This article was written by expert contributor, Wilson Asset Management
This is part 2 in a 4-part series on real assets and the investment opportunities.
The bull case for agriculture
With such a long-term investment horizon, the economic fundamentals for most real assets look positive, but this is particularly the case for agriculture, which has a clear megatrend in its favour.
According to the United Nations, approximately 385,000 babies are born every day, which means there are 140 million more mouths to feed every year. The world is experiencing increasing demand for food, but the amount of land available upon which to grow it is ultimately finite. Combined with the trend towards healthier lifestyles, changing diets and increasing awareness of the climate crisis, the long-term market fundamentals for agriculture assets look robust.
Historically, Australian agriculture has been dominated by family businesses, but that is beginning to change. Over the last decade, a considerable amount of institutional capital has started to flow into the sector, attracted by Australia’s transparent regulatory environment, strong legal system and relatively low levels of protection (in the US, for example, it is far harder for foreign investors to buy farmland in certain states). This wall of capital has driven prices gradually upwards, bringing Australia more into line with international agricultural land valuations.
There are two main ways to invest in agriculture
The first is known as cash-lease, where an investor buys the land and then leases it to an operator in return for an income stream. The advantage of this route is that returns are predictable and operational risk is outsourced to the operator.
The second is an operational strategy whereby an investor buys the land and operates it too. This is a higher risk because the investor must embrace the operational risk and the volatility that naturally comes with the variability of harvests and productivity. Nevertheless, in the long run, the returns from this type of strategy should be higher, as the investor is capturing more of the profit margin.
In the US, the cash-lease model is well-established, but the family business legacy of the Australian agricultural industry means the owner-operator model is much more entrenched.
The risks of investing in agriculture
It goes without saying that investing in agriculture is not without risk.
These include weather events such as droughts, wind and extreme rainfall. Insurance is expensive and sometimes unavailable for agriculture assets. Investors should therefore be prepared to embrace volatility in returns, reinforcing the need for a long-term investment horizon.
The future of greenhouses
One area of agriculture that looks particularly interesting currently is the advent of sustainable greenhouses. These are industrial-scale, state-of-the-art greenhouses that utilise resources as efficiently as possible by capturing and reusing energy and water from sustainable sources. They do not use fertilisers or other chemicals, and the entire environment is controlled to deliver an optimal blend of efficiency and yield.
The greenhouses are leased to operators who pay an attractive rental income to the asset owners. They are already becoming popular in Europe and the US and we are aware of a few market players that are interested in bringing this innovative new growing system to Australia.
Part 1 – What are ‘real assets’?
Part 3 – Real assets: Timber – seeing the wood for the trees
Part 4 – Real assets: Water rights -the ultimate liquid investment
Wilson Asset Management has a track record of making a difference for shareholders and the community for more than 20 years. As the investment manager for eight LICs – WAM Capital (ASX: WAM), WAM Leaders (ASX: WLE), WAM Global (ASX: WGB), WAM Microcap (ASX: WMI), WAM Alternative Assets (ASX: WMA), WAM Strategic Value (ASX: WAR), WAM Research (ASX: WAX) and WAM Active (ASX: WAA) – Wilson Asset Management invests over $5.4 billion on behalf of more than 120,000 retail investors.
Wilson Asset Management created and is the lead supporter of the first LICs to deliver both investment and social returns: Future Generation Australia (ASX: FGX) and Future Generation Global (ASX: FGG). Wilson Asset Management advocates and acts for retail investors, is a member of the global philanthropic Pledge 1% movement, is a significant funder of many Australian charities and provides all team members with $10,000 each year to donate to charities of their choice. All philanthropic investments are made by the Investment Manager.
Prior to making an investment decision, retail investors should seek advice from their financial adviser. This document is intended as general information only.