Investment Opportunities in Western Australia S Grains Industry: Grain Producing Land

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Investment opportunities in Western Australia’s grains industry:
grain producing land

Table of Contents

Investment highlights 2

Industry overview 3

Investment opportunity 8

Financial analysis 10

Risk analysis 13

Investment regulations 14

Other important information 15

How to progress 16

Disclaimer 17

Investment highlights

·  The Western Australian (WA) grains industry is looking to continue to expand to meet growing demands for grains grown in WA and provides an exciting opportunity for investors who wish to participate in its continuing success.

·  The expansion is driven by a continuing growth in productivity and the adoption of innovation and new business models that increase the volume and value of production.

·  The WA Wheatbelt has provided investors with consistently positive returns. Actual returns vary season to season due to weather and prices. Over the past 14 years with rare exception, grain growing in WA has on average, generated positive returns and for well-run businesses some very high returns.

·  Many grain growers have experienced returns in excess of the ASX All Ordinaries with significantly less volatility. In addition to providing positive yearly returns, every region over the past decade has also provided land owners with strong capital gains. While it is difficult to predict future capital gains there has been a long history of capital growth.

·  Investors can participate in grain production capacity through a variety of different means, from outright purchase of land, joint ventures with existing grain growers or participation in investment groups. The market for land is mature and provides an established mechanism for participating in the industry.

·  The returns available to an investor investing in grain production capacity vary and are dependent upon:

o  Who manages the land and is responsible for business decision making.

o  How the land is managed, including decisions around what crops to plant and other operational questions that can impact costs and yield.

o  The risk the investor is willing to accept and the subsequent structure they use to make their investment.

o  The price paid for the initial investment.

o  The impacts of weather and the markets for the different grains.

o  In recent years, corporate investors have become more common, with investors putting in excess of $A50 million (m) into the industry, creating a diverse portfolio of investment properties. The amount required to be invested can range from A$5m to A$50m or more.

·  In recent years increased debt levels have reduced overall returns. This has limited the ability of existing land owners to continue to consolidate holdings and increase the capitalisation of their businesses. This opens up an opportunity to investors with capital to enter the market through a range of different investment modes.

Industry overview

The Western Australian grains industry competitive advantage.

Image 1 The Australian Wheatbelt and reliability of the Western Australian Wheatbelt.

·  The Western Australian (WA) grains industry has lower production risk due to less rainfall variability than other parts of Australia.

·  In relation to infrastructure WA has lower supply chain costs in transporting grains from farms to export ports.

·  The WA grain industry is internationally recognised as being clean and green. There is a strong product integrity focus and commitment from farmers all along the supply chain.

·  The WA grains industry enjoys freedom from many pests and diseases present in other international grain provinces.

·  In addition WA grains industry is free from mycotoxins and contaminants and residues.

·  Highly skilled WA growers and farm business managers are well supported by a network of professional farm management consultants and agronomists.

The Wheatbelt

Image 2 Western Australian grain growing regions and export port zones

The Western Australian Wheatbelt covers approximately 9m hectares (ha), from north of Geraldton, to the south coast at Albany, east along the coast to Esperance and to the east of Merredin.

Across this vast area of Western Australia (WA), 4700 growers have built a world leading dry climate grains province that consistently produces crops with a combined value of around $A4 billion (b).

The average farm size in WA is approximately 4500 hectares. The size of the average farm has been increasing rapidly with larger more successful farmers and corporate investors consolidating properties to drive efficiencies and employ new innovative farming methods.

The most common form of property ownership is still a single farmer or single family; however there are also cooperatives and more recently an increasing number of corporate owners.

Farms in the wheatbelt predominantly grow wheat, although there are significant amounts of barley, canola, oats, lupins and filed peas grown. Grain growers in this region often carry sheep for wool and meat on the same properties which reduces risk and can increase returns.

Recent Western Australian (WA) grains industry changes and investments

There has been significant investment activity across the Western Australian (WA) grains supply chain, especially following deregulation of the export wheat market in 2008.

There is also a competitive and well developed grain industry supply chain sector including storage and transport infrastructure, grain marketing, and suppliers of inputs – machinery, fertiliser, chemical, technology and financial products servicing WA grain growers.

Value adding businesses in WA are focused on production of malt, canola oil, oat products, and lupin products.

·  1991 - Grain Trade Australia (GTA) was formed to formalise commodity trading standards, develop and publish the trade rules and standardise grain contracts.

·  1992 – Mitsubishi and Davison Oilseeds establish a minimum price scheme for canola.

·  1999 – Introduction of competition in the WA domestic grain market.

·  2000–WA grain railway network leased by the State Government – currently Brookfield is operating the ‘below rail’ part of the system.

·  2007 – Wheat Export Authority established in preparation for partial deregulation of wheat exports.

·  2008 – Partial deregulation of bulk exports of wheat from Australia by accredited exporters.

·  2010 - Grain Pool of WA renamed to CBH Grain.

·  2012 - The CBH Group invests $A176 million in 574 aluminium purpose-built wagons and 22 locomotives to service the WA grains industry

·  2012 Kuala Lumpur Kepong Bhd (KLK) has purchased 26,000 hectares of grain producing land near Dandaragan, Northampton and York.

·  2012 Glencore acquired Viterra who trade grain in the WA marketplace.

·  2012 Hassad Australia purchased a range of farms in WA.

·  2012 Heilongjiang Feng Agriculture (HFA) purchased 30,000 ha of land in south eastern WA, including grain storage transport and loading facilities at Albany port.

·  2012 - Bunge starts to build a bulk grain export facility in Bunbury with 48,000 tonnes of capacity and permits to export up to 500,000 tonnes in the next two years.

·  2013 - Cargill Australia Limited acquired the Joe White Maltings business, including the 200,000t plant at Forrestfield.

·  2013 - Swiss-based Vitol emerged as a new buyer of WA grain in 2014 - Emerald Agribusiness Group sold its 50 per cent share in Emerald Grain to Japanese partner the Sumitomo Corporation.

Market for grain producing capacity

Figure 1 Average land value per hectare

Figure 2 Average farm size

Over the past decade all areas have seen a strong increase in the value of agricultural land. On average land values have risen by 156% with some higher rainfall areas seeing capital gain in excess of 200%. Note that land prices have also fallen for periods over this time frame, particularly in areas that have suffered from greater than average reduced rainfall or poor profitability

There is a liquid market for agricultural land throughout the wheatbelt. Properties are sold via agents and all property sales are recorded and titles issued by the state government. For the three years to the end of 2013 there were over 440 properties of greater than 800h sold across the wheatbelt.

The availability of land and prices are influenced by the relative profitability of the grower, however there are enough independent owners of land who are buying and selling property for their own purposes that there is generally a good variety of property available for investors.

The drivers of capital appreciation have been:

·  Consolidation of the industry. Individual farmers have been buying out their neighbours’ properties when they come on the market with the aim of taking advantage of efficiencies from better utilisation of capital equipment and labour.

·  Acquisition of land by corporate investors. Corporate investors still hold a relatively small amount of land in comparison to individual growers, but they have influenced the market in certain areas, particularly in more marginal areas where corporate investors capacity to withstand poor seasons is greater.

·  Improved productivity and price. Over the past decade productivity and grain prices have continued to increase, although at a lower rate than some input costs. This has enabled good farmers to earn more from each hectare of land.

The market for agricultural land is expected to remain firm for the foreseeable future given:

·  Stable and growing demand for grains which should support current market prices.

·  Continued consolidation of land ownership by growers and corporate agricultural investors.

·  Increased investment in productivity research and development by the Western Australian and Australian governments and industry bodies such as the Grain Research and Development Corporation.

Investment opportunity

Investors in grain producing capacity can participate in the industry in a variety of ways. Professional investment advisors can identify the appropriate approach for each investor, given their objectives, capabilities and appetite for risk. The primary means of participating are described below:

Table 1 Investment opportunity

Investment type / Description / Property management options / Types of return available to investors /
Outright purchase / Purchase of agricultural land / ·  Passive – owners employ a farm manager to manage the property on their behalf. The manager would make all strategic and operational decisions in-line with the investment objectives of the owner.
·  Lease – the land would be leased out to other growers who would pay to have access to the land and take all the risk of producing a crop.
·  Active – become actively involved in on-farm management, in particular the key decisions of what crops to plant, the application of key inputs, production hedging strategies, investment in capital equipment and use of on-farm labour. / ·  Profit generated by the property – as the owner of the property the investor would keep the net income from the property. Returns are highly dependent on the yield and market price for the crops grown on the property.
·  Lease rental – this would be a monetary payment for use of the land. There is normally no participation in the value of crops grown on a leased property.
·  Capital gain – this is only realised on sale of the asset.
Joint venture (JV) / Partnering with existing growers who already own land or for the purchase of additional land / ·  Passive – all operating decisions would be left to the joint venture partners with review of key decisions and results in line with the joint venture agreement.
·  Lease – land is leased to third party growers who would pay to have access to the land.
·  Share farming – by mutual agreement with joint venture partner, the investor would provide inputs into the venture such as: decisions around cropping, inputs such as fertilizer and seeds. The owner would also handle insurance and production hedging. All other growing activity would be carried out by the joint venture partner. / ·  Share in profits generated by the property – this is would be the nominal profit generated by the property less an agreed management fee for the operators of the property.
·  Lease rental – this would be a monetary payment for use of the land. There is normally no participation in the value of crops grown on a leased property.
·  Off-take from property production – according to the joint venture agreement an investor could take their return via physical product which they can sell or use as they wish, less an agreed management fee for the operators.
·  Capital gain – this would only be realised by the sale of the land by the joint venture or the winding up of the joint venture.
Joint investment / Joining with other investors to create a pool of cash available to invest in agricultural land / ·  Passive – the land management fund company would manage the properties the fund has purchased. The management company may choose to employ a variety of different methods to manage the properties depending on the individual farm’s characteristics, including employing individual managers or contracting with a professional farm management company. / ·  Share in profits generated by the fund – this is would be the nominal profit generated by the properties owned by the fund less an agreed management fee for the operators of the fund.
·  Off-take agreement for production from fund owned land.
·  Capital gain – this would be realised upon departure from the fund or via a capital distribution by the fund.

Financial analysis

Figure 3 Average income per hectare (wheat)

Figure 4 Costs per hectare (wheat)

Figure 5 Impact of variation in yield on income

Figure 6 Grain prices 2008-2012

Growing grain in Western Australia (WA) is a profitable business. Many growers are earning at or above average stock market returns, with lower volatility.

Variability in profitability is driven by market prices and weather, both of which are beyond the farmer’s direct control. However, there are mechanisms to mitigate the risk caused by this variability.

The profitability of each property can be positively influenced by the grower’s decisions. Making the right decisions on which crops to grow, when to seed, the level and timing of the application of fertiliser can increase or decrease relative profitability by up to 25%.

In addition, the decisions and practices that a grower employs can have a substantial impact on the costs of operating an individual property. The largest controllable costs are the application of fertiliser and weed/pest control. In both cases however there is a trade-off between reducing costs and the yield that a property can produce. (Note, the relationship is not linear.)