David Sackett

Drought in New South Wales and Queensland is becoming increasingly severe but overall, Australia’s farming sector is holding up well, a leading farmland investor says.

Growth Farms Australia Managing Director David Sackett says farmers have had good operating results and land appreciation over the past few years, which has given them the opportunity to go into the drought in good shape.

According to the Australian Farmland Index, since 2014 farm sector income has grown by 6.2 per cent a year and capital appreciation has grown by 6.8 per cent a year, contributing to a total return of 13.2 per cent a year for the sector.

Mr Sackett says there is evidence that farmers have used returns in the good years to put a significant amount of their earnings aside to help them through difficult times. At June 30, the total holdings in the Farm Management Deposits scheme were $6.62 billion. FMD savings have grown from $4.14 billion in June 2014. In June 1999 total deposits were just $200 million.

The Farm Management Deposits scheme is a risk management tool designed to help primary producers deal with uneven cash flows, allowing them to claim a deduction for deposits that are held in the account for a minimum of 12 months.

The farm sector outlook may not be as bad as many fear. The Australian Bureau of Agricultural and Resource Economics and Sciences has forecast that the value of farm production will increase by 1.5 per cent to $61 billion in the 2018/19 financial year. The value of livestock production is forecast to increase by 3 per cent, while the value of crop production is forecast to remain unchanged, although these forecasts may be hard to achieve given how the current season is unfolding.

Mr Sackett says drought is a normal part of the cycle and many farmers have developed “very good strategies” for coping with it.

“We have seen a lot of government reviews of drought policy; there has been a lot of work on this and there have been plenty of good ideas. The problems seems to be that once we get into the drought, we get all sorts of pressure and we go back to developing policy on the run. We confuse the issue of supporting people who are doing it tough and need welfare, with supporting businesses. The first should be given, the second is a retrograde step.”

When it comes to investing in the sector, Mr Sackett says that as with any market, there are areas that are more prone to volatility and commodities that produce different returns over time.

Managing this volatility requires an understanding of production correlations across regions and price correlations of commodities. For example, southern Queensland and western Victoria have a negative production correlation historically, while prices for beef and wheat also have a negative correlation.

“It is never the case that all regions and all commodities are affected by environmental factors in the same way at the same time,” he says.

“As a portfolio manager, one of the things we look for is flexibility of land use, as it creates options for farming enterprises.

Growth Farms Australia has recently launched the Australian Agricultural Lease Fund, open to wholesale investors, with a minimum investment of $100,000. It is a closed-end unit trust with a term of 10 years, although unitholders will have an opportunity to vote on continuing the fund or winding it up after five years.

The fund will acquire farmland and water rights in higher rainfall regions, including North Queensland, Northern New South Wales, the Southern Murray Darling Basin, Victoria and Tasmania and South Australia.

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David Sackett

One of Australia’s leading financial planning firms, Providence Wealth, has made a substantial investment in Growth Farms Australia’s new farm leasing fund, the Australian Agricultural Lease Fund, acting as a cornerstone investor for the innovative scheme.

Providence Wealth’s managing director Grant Patterson says the firm was looking for investments in the agricultural sector to give its clients greater diversification but could not find what it was looking for.

“None of the corporate vehicles or products offered by investment banks were appropriate. I did not think the people running them had sufficient expertise,” Patterson says.

He was introduced to Growth Farms’ managing director David Sackett several years ago and they started talking about a product that would work for Patterson’s clients.

Providence Wealth is an independent financial planning firm catering to high net worth individuals, wealthy families and not-for profit organisations, with around $1 billion of funds under care.

Patterson says: “Our clients are long-term investors with patient capital. So, they are not put off by the prospect of an illiquid asset with a 10-year life.

“We are attracted to agriculture because it has low correlation to other assets and it has a number of economic tailwinds behind it. Australian primary producers are catering to growing demand from Asia and they are making strong productivity gains through the use of technology.”

The Australian Agricultural Lease Fund will buy agricultural land, typically with a value under $10 million, and lease it to primary producers. Farm leasing is a well-established model in the US and other markets, and Growth Farms believes it has strong potential in the local agricultural sector.

Growth Farms’ managing director, David Sackett, says the advantage of the leasing model is that it gives farmers an opportunity to expand their businesses without having to find the capital to buy more land.

A farm leasing fund is similar to a commercial property fund, where investors receive an income based on the rental yield and are exposed to the change in the capital value of the property, not the value of the business using the property.

Growth Farms has forecast that the Australian Agricultural Lease Fund will produce an annual gross yield of 4.5 per cent. Lease terms will be struck on a three-year term initially, with extensions of three and four years. They will be indexed to CPI and adjusted to land valuations at rollover.

Sackett notes “Historically land has increased in value at around 6% per year and this increase in value, which is an important part of Fund returns, and will be returned to investors at the close of the Fund”.

Patterson says: “This suited us because we did not want exposure to the underlying production risk. We like having exposure to the growth in the value of the land as it improves.”

Patterson says he also likes the fund’s strategy of acquiring fairly small parcels of land, allowing local farmers to expand their operations, rather than taking the risk on leasing large holdings.

The Australian Agricultural Lease Fund is open to wholesale investors, with a minimum investment of $100,000. It is a closed-end unit trust with a term of 10 years, although unitholders will have an opportunity to vote on continuing the fund or winding it up after five years.

The fund will acquire farmland and water rights in higher rainfall regions, including North Queensland, Northern New South Wales, the Southern Murray Darling Basin, Victoria and Tasmania and South Australia.

Growth Farms was established in 1999 and currently invests in Australian agriculture on behalf of institutions, family offices and high net worth individuals. It has more than $440 million of funds under management.

Since 2008 it has produced a pre-tax internal rate of return of 10.4 per cent a year.

Growth Farms portfolio managers currently operate in a number of regions and have experience in acquiring and leasing properties in the target areas.

Patterson says: “One of the things we like about Growth Farms is that it has people on the ground working with farmers in their communities. It is not a bunch of people in suits.”

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David Sackett

Specialist agricultural asset manager Growth Farms Australia has launched an innovative investment trust, the Australian Agricultural Lease Fund, that will buy agricultural land and lease it to primary producers.

Farm leasing is a well-established model in the US and other markets, and Growth Farms Australia believes it has strong potential in the local agricultural sector.

Growth Farms Australia’s managing director, David Sackett, says the advantage of the leasing model is that it gives farmers an opportunity to expand their businesses without having to find the capital to buy more land.

Sackett says: “Many existing farms are subscale and capital constrained. Leasing overcomes this.”

From an investor’s point of view, it provides a stable cash flow based on rental yield and avoids much of the volatility that comes with direct exposure to agricultural markets.

Sackett says investing in a farm leasing fund is similar to investing in a commercial property fund, where investors receive an income based on the rental yield and are exposed to the change in the capital value of the property, not the value of the business using the property.

The Australian Agricultural Lease Fund is open to wholesale investors, with a minimum investment size of $100,000. It is a closed-end unit trust with a term of 10 years, although unitholders will have an opportunity to vote on continuing the fund or winding it up after five years.

The fund will acquire farmland and water rights, and lease them to third-party farming businesses. It will invest in higher rainfall regions, including North Queensland, Northern New South Wales, the Southern Murray Darling Basin, Victoria and Tasmania and South.

Growth Farms portfolio managers currently operate in all these regions and have experience in acquiring and leasing properties in the target regions.

Growth Farms was established in 1999 and currently invests in Australian agriculture on behalf of institutional, family office and high net worth individuals through separately managed accounts and unlisted funds. It has more than $440 million of funds under management.

Since 2008 it has produced a pre-tax internal rate of return of 10.4 per cent a year.

Growth Farms has forecast that the Australian Agricultural Lease Fund will produce an annual gross yield of 4.5 per cent. Lease terms will be struck on a three-year term initially, with extensions of thee and the four years. They will be indexed to CPI and adjusted to land valuations at rollover.

Capital returns in high rainfall areas have averaged around 6 per cent over the past 40 years. Growth farms estimates that agricultural land values will appreciate by CPI plus 2-3 per cent over the long term – driven by increases in agricultural commodity prices and productivity gains.

Sackett says one of the attractions of agricultural land is that it has low correlation to other assets.

“Over the 20 years to 2016, Australian agriculture is negatively correlated to international equites and Australian fixed interest, and has a low correlation to Australian equities and Australian REITs,” he says.

The Fund has an ESG focus. Sackett says Growth Farms wants to leave each farm it acquires in better condition under its ownership.

“We will look at a range of environmental issues, including salinity, water quality and important vegetation ecosystems.

“And we want tenants who are engaged with their local communities. For example, we will be looking for farmers who are prepared to take on local people for work experience.”

The Fund will have a maximum size of $100 million and maximum leverage of 30 per cent. The target size for each farm will be $3-8 million, which Growth Farms says provides the best lease returns.

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