How to invest in agriculture without buying a farm (afr.com)

The portfolio thesis for investing in agriculture is compelling – this is how to gain exposure.

Agriculture has always been a theme that has fascinated Australian investors seeking to diversify their portfolios beyond traditional bonds, equities, and properties. But for so long the sector has been difficult to get access to without stepping up and buying a farm.

But the limited pathway to getting effective exposure is slowly changing as investment managers are becoming more creative in packaging different business models and commodities into investment risks right across the capital stack.

The portfolio thesis for investing in agriculture is compelling. The agriculture sector is an attractive choice for diversification due to its unique characteristics, potential for steady returns, and role in addressing global food demand. The tail winds of the sector are obvious with the United Nations estimating that the world will have another 2.2 billion people to feed by 2050.

The increasing demand for quality meat, seafood and other agricultural products from a rising middle class in Asia is an obvious opportunity for the Australian agricultural sector to seize. Australia exports around 72% of the total value of agricultural, fisheries and forestry production. Export orientation of each industry can vary by commodity type with wheat and beef more export-focused than dairy, horticulture, and pork.

Historically in Australia, most farms have been owned by private families and investors have been forced to gain exposure via a limited number of options on the ASX. Companies like Elders, Ridley or Nufarm who provide inputs into the farming process have had chequered histories while commodity logistic companies such as

Graincorp have been a traditional way to gain weather-related exposure for institutional investors. Many other companies have been lost through foreign acquisition.

Internationally, investment options have been far more diverse. Farmland, timberland, commodities, agriculture and food technology, food processing, storage, water, and agribusinesses involved in the value chain have all been available in listed and fund opportunities. There has been a risk return option to suit most investors.

But the lack of access in Australia has been slowly improving over recent years as new listings of smaller companies have added to the diversity of ASX options, including Ingham (chickens), Costa (berries) and Cobram Estate (olives).

Agricultural real estate funds like Warrakirri and Centuria have been brought to market and can provide regular income streams via farmland purchases and leases to operational farmers. Businesses involved in the leasing of quotas in harvesting seafood such as Longreach’s Maris Seafood Fund or water rights via the Duxton D20 water fund provide an unusual way to diversify income streams with some underlying agricultural risk.

While the options to gain specific single sector exposure in agriculture, fisheries and forestry via funds are expanding, investors are also being presented with more diversified alternatives such as AAM’s diversified agriculture fund which has more than twenty different farm businesses across four states. Diversifying across geographies and commodities helps to reduce the idiosyncratic risks of holding a single commodity asset in one district.

Agriculture accounts for over half of Australia’s land use and a quarter of water usage so the sustainable management of this land is a critical issue for both farm businesses and society more broadly. Many of the innovative solutions to address the challenges in the agriculture sector are coming from start-up businesses looking to

address climate change issues and improve the productivity of the sector. Ag-Tech startups often focus on areas like precision farming, sustainable agriculture, and agricultural biotechnology. Investing in these ventures can offer investors access to potentially high-growth opportunities along with having a real-world positive impact with your investment dollars.

While investing in agriculture can offer diversification and potential rewards, it is essential for investors to understand their risks. Australian agricultural producers manage significant variability, including fluctuating climate conditions and volatile commodity prices. These factors generate substantial variation in farm output and incomes, greater than that experienced by farmers in most other countries and by business owners in other sectors of the Australian economy. Along with geopolitical events and global trade policies, agriculture is also subject to various domestic regulatory and environmental considerations, such as changes in government policies, land use regulations, and sustainability practices.

Diversifying an investment portfolio against traditional assets like bonds, equities, and properties can be achieved through strategic investments in the agriculture sector. While investing in agriculture presents unique challenges, it also offers the potential for steady returns, tangible asset ownership, and a role in addressing global food demand. With some proper research, advice and appropriate risk management, personal investors can embrace the opportunities that agriculture presents as a key component of their diversified investment strategy.