Is agricultural land a good investment if you’re not a farmer?

An investment fund that specialises in agricultural land in Australia may have several advantages for individuals seeking yields. The best part is that you needn’t be a livestock or crop producer to reap the potential benefits of investing in farmland in Australia.

An investment in agriculture need not involve purchasing farmland to grow crops or raise livestock. Instead of farming on farmland, investors can invest in the land value. Australia’s farmland is reasonably priced relative to other net exporters of agricultural products. At the same time, farmland’s median price has been increasing. In 2021, over 10.8 million hectares of land were sold for a combined value of $15.6 billion, according to a report by the Rural Bank. The agriculture real estate market is attracting non-farmers, in part, because of the strength of this country’s agriculture sector.

Why invest in agriculture?

Australia’s agriculture exports are well-regarded and in demand. The primary product sector is well positioned to lead in sustainable, high-quality exports and meet a growing global population with a taste for Australia’s agricultural products. And, despite challenging environmental impacts, record-high oil prices and disruptions in the global supply chain, our market share has managed to grow. 

Aside from its position as a net exporter of meat and horticulture, Australia’s farmland attracts foreign investors and land prices are rising¹. Additionally, greater capital investment in food production and related agribusinesses like processing, packaging and supply chain management supports Australian agriculture sector and farmland values¹. Thus, you don’t need to know how to farm to choose a good investment in agriculture. 

Types of agricultural land

To indirectly profit from the land, an agricultural investment fund provides the opportunity to reap passive income from lease yields on a regular basis. Australia has several types of farmland operators thanks to the diversity of resources available on the continent. The Australian Bureau of Statistics reports that there are about 387 million hectares of agricultural land with 87,400 agricultural businesses in Australia. Land use by agricultural output is broken up as follows:

• Livestock graze on 332 million hectares.
• Crops use 32 million hectares.
• Forestry occupies 0.7 million hectares.

Australia’s agricultural diversity comes from its climate, soil types, access to water and proximity to markets. A key reason for our agricultural sector’s performance is an efficiency of scale. Large farms, with gross profits of $1 million or more, account for most of the sector’s revenues and land use. Incidentally, larger farms are more profitable than smaller, family farms because of their structure and use of technology.

Additionally, farming is ever-changing. 

Australia’s agriculture production structure shifts as the number of farms per industry group changes. Livestock farms have increased steadily over decades, whilst crop farming has fluctuated in its share of the sector over the last fifty years. To add to that, innovative techniques like glasshouses and aquaculture, can help add value to the overall agricultural landscape. 

To remain competitive, farming the land must become more sustainable and eco-friendly in its production of the meat, fish, horticulture and grain that account for $47 billion in exports to Asia, Europe and the United States according to the National Farmers Federation.

Valuing agricultural land

Deciding whether or not to enter the agriculture investment market is easier if you understand how the land (the asset) is valued. 

Historically, farmland as an asset class has been valued by comparing the sale of one farm to another. However, farms with comparable property values in a given location can be hard to find. So, the valuation of an agricultural asset must be made another way.

Typically, fund managers consider the capitalisation rate (cap rate) of a property which is the ratio of the annual net operating income and the cost of the land. For example, if the price of a parcel of land is $175 million and the net operating income is $10 million per year the capitalisation rate is 5.71%. 

The cap rate is important to investors because it essentially represents the annual return on a cash investment.

Impacts on an agricultural fund’s value

The value of the agricultural property held by a fund depends on factors such as sustainability of the agriculture sector and the farmers’ ability to generate income from raising livestock or crops to export. In addition, the underlying drivers of profitability for agriculture operators are numerous including:

• Climate conditions
• Pests and disease management
• Capital and risk management by agriculture operators
• Demand for Australia’s products
• Real-world prices
• Innovations in farming, packaging and processing agriculture products
• Adoption of sustainable farming and resource management
• Trade relations and tariffs
• Supply chain issues
• Capital investment in research and development
• Access to debt financing and institutional investors. 

Individuals have the potential to gain exposure to a primary production sector at a time when Australia’s agricultural products are in demand and our eight largest trading partners have a growing middle class.

Options for agriculture property investment

As an asset class, agricultural land investment through an investment fund can potentially generate regular income distributions and long-term capital gains. Let’s take a closer look at two specific types of investment that individuals have access to through licensed fund managers with special expertise in farmland investing. 

Unlisted agricultural property fund

In the simplest terms, an unlisted agricultural property fund is: 

1. Not listed on the stock exchange such as the Australian Securities Exchange (ASX) and
2. Is a form of direct investment in an agricultural property investment fund that may have a diversified portfolio of farmland assets with strong fundamentals. 

The value of the land is primarily based on the income the property produces. 

For farmland investing, the value of your units mainly relates to the rental income that the farm produces. As part of the investment strategy, agriculture property fund managers would typically seek an asset with a strong lease agreement and a reputable tenant to ensure income. So, an unlisted agricultural property fund may look for farmland that is well located with access to appropriate infrastructure such as processing facilities and transportation — and can secure, or already has, a profitable agricultural operator as a tenant. 

Investors have the option of investing in an unlisted agricultural property fund on a closed-ended or open-ended basis. 

Closed-ended means that you cannot redeem your units until the underlying property is sold, proceeds are distributed and the fund is wound up. 

Open-ended funds indicate that you can periodically redeem part or all of your units in the fund at certain times throughout the life of the fund because the fund has no end date.

Unlisted funds are considered long-term, passive investment options. 

Agriculture real estate investment trust (REIT)

A real estate investment trust or A-REIT is listed on the ASX (unlike unlisted property funds). This means your A-REIT agricultural property securities are publicly traded on a daily basis. You have the potential exposure to a wide range of properties without the large outlay, but it may come with greater volatility than an unlisted agricultural property fund. 

The benefits of an A-REIT include the potential for regular distributions and the ability to easily liquidate your securities. One advantage of investing in an A-REIT of agricultural land is that generally the entry point price is relatively low. However, the price of A-REIT securities may not be representative of the underlying value of the land as is the case with an unlisted agriculture property fund.  

But remember that all investments carry risks. You should consult your financial adviser before you invest in an agricultural property fund. 

If you want to find out about agriculture investment opportunities, you can click here.

1. https://www2.deloitte.com/au/en/pages/consumer-industrial-products/articles/investment-australian-agriculture-bridging-gap-between-status-quo-ambition.html; https://nff.org.au/wp-content/uploads/2020/02/NFF_Roadmap_2030_FINAL.pdf; https://www.agriculture.gov.au/abares/research-topics/agricultural-outlook/agriculture-overview

Disclaimer: All investment strategies and investments involve risk of loss. This content should not be construed as investment advice and does not constitute any offer or solicitation to offer or recommend any investment product. Centuria recommends you seek independent financial advice from a financial adviser which takes into account your personal financial goals and circumstances.