Rising fuel, fertiliser costs to crimp bumper farmland returns
Bumper conditions in the $80 billion agricultural sector lifted total annual returns for prime farmland to almost 15 per cent over the year to March, but increasing headwinds, including rising fuel and fertiliser, costs have dampened the outlook.
Over the March quarter, the ANREV Australian Farmland Index – which tracks the performance of a $1.8 billion basket of institutional-grade assets managed by the likes of Aware Super, Gunn Agri Partners and Rural Funds Management – generated a total return of 2.5 per cent, taking the total annualised returns to 14.7 per cent.
This was higher than the 13.1 per cent total return generated over the 2021 calendar year, as most farmers benefited from above-average winter and summer crop harvests and soaring commodity prices, including beef.
Looking ahead, the outlook for farmland returns remains generally favourable, with agricultural production in the 2023 financial year expected to exceed $80 billion – not far off this year’s record $83.1 billion harvest – and continued strong demand for assets from cashed-up farmers looking to expand their businesses.
However, there are also growing headwinds facing the sector, including the prospect of lower profit margins due to rising input costs and rising inflation, which could affect future investment decisions and reduce capital growth.
A survey of 1000 farmers by Rabobank this month found rural confidence declined for the third consecutive quarter to “cautiously optimistic”.
According to Rabobank,”the prospect of a third consecutive bumper grains harvest has been reined in by the increasing cost of vital farm inputs such as fertiliser, fuel, freight and machinery, and broader inflationary pressures in the Australian economy”.
The survey found confidence was highest in the cotton, grain and dairy sectors, where farmers are enjoying a combination of high prices and excellent seasonal conditions.
This confidence was mirrored in the performance of the Australian Farmland Index, which showed annualised total returns of 39 per cent for properties planted with annual crops such as like wheat, barley and cotton, or used for livestock grazing country. The total return comprised a 10.3 per cent income yield and capital growth of 27 per cent.
Income yields for farmland planted with permanent crops such as wine grapes, citrus and almonds were healthy at 6.1 per cent for the year to March. However, annualised capital growth was just 1.25 per cent, resulting in a more modest a 7.5 per cent total return.
Commenting on the latest quarterly update, Gunn Agri Partners said it showed farmland was still generating “above trend returns”, especially for those properties growing annual crops such as grain and oilseeds (soybean, canola, rice and cotton).
“The performance of annual farmland over the full year to March has been strong due to above-trend income contributions, a result of above-average winter and summer crop harvests on the eastern seaboard and soaring beef cattle prices as exporters and re-stockers fiercely continue to compete for stock,” Gunn Agri said.
Lending to farmers is also proving lucrative for Liberman family backed non-bank lenders Merricks.
In its latest weekly market update, Merricks said it expected to deliver an 8 per cent net return to investors in its agricultural credit fund, which it launched last year and has to date raised and deployed $225 million.
“Demand for agricultural and specialised infrastructure assets remain strong, as investors seek inflation and interest rate linked opportunities through turbulent markets,” Merricks said.
“Although rising input costs and labour challenges do present hurdles for primary producers, our extensive loan monitoring and meetings with our borrowers suggest that most have adequate supplies or cash reserves for the upcoming growing seasons.”