FEATURE | Agriculture | Beneath the soil

When rain settles, there's a certain kind of optimism that hangs in the air.

The soil holds its moisture, crops move ahead of schedule, and the season begins to look less like a gamble. For a farmer, these changes can mean the difference between a harvest that pays its way and one that leaves little behind.

Across parts of Australia, conditions have improved. However, the outlook for agriculture is being shaped by forces that extend well beyond the paddocks: global grain supply, geopolitical conflict, rising input costs, shifting diets and the demands of a growing population.

For investors, this convergence is drawing attention back to a sector that has always offered a compelling proposition. People need to eat and Australia has land, agricultural expertise and established export markets that position it to supply that demand. Yet the path from those advantages to an attractive investment is rarely straightforward.

The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) expects the gross value of agricultural production to fall 5% to $99.4 billion in 2026-27, with exports forecast to decline by the same margin to $76.3 billion, considering the results to still be one of the strongest on record. But the figures conceal a more complicated picture for producers.

Average broadacre farm business profit is forecast to fall 39%, from $219,000 in 2025-26 to $133,000 in 2026-27. The decline reflects lower production in some regions, softer livestock prices following strong years and the persistent weight of fuel, fertiliser, labour and other operating costs.

For ABARES assistant secretary, agricultural forecasting and trade Kurt Hockey⁰¹, the sector's resilience remains evident even as conditions diverge across the country.

The agency's production outlook remains historically strong, with the forecast representing the second-highest result in nominal terms and the fifth highest after adjusting for inflation. But national figures can smooth over the differences between a farm that has benefited from a wet winter and one still waiting for meaningful rainfall.

"It's a very mixed story across Australia," Hockey says.

Above-average winter rainfall has improved soil moisture and crop prospects in South Australia, Victoria and southern New South Wales, where some crops are several weeks ahead of their usual development. Conditions are drier in parts of northern New South Wales and Queensland, leaving producers more exposed to what the coming months bring.

That unevenness is important to investors because agriculture is not a single market move in one direction. The outlook for a grain grower differs from that of a cattle producer, an almond orchard or a company supplying fertiliser and seeds. Even within the same industry, location, scale, water access and operating costs can determine whether a strong commodity price translates into a stronger balance sheet.

One of the more consequential changes is emerging in grain markets. After several years of growth, global grain production has softened, while demand continues to increase. That shift could support prices for local producers, particularly if dry conditions in parts of the US and Western Europe increase demand for Australian supplies.

Hockey says the international outlook could provide a more favourable pricing environment for some growers, although the effect will depend on how the season develops and how much grain competing exporters bring to market.

Australia's winter crop is expected to be the fourth largest on record, despite a forecast decline in wheat production. ABARES expects wheat output to fall 17% to 29.9 million tonnes in 2026-27, a result that remains above its long-term average. Barley production is forecast at 16.4 million tonnes, the second highest on record, while canola production is expected to ease 5% to 7.3 million tonnes.

The figures illustrate the distinction between a smaller harvest and a poor one. If production falls while demand holds or rises, prices may provide a degree of compensation. But growers still need sufficient yield to cover the cost of getting the crop out of the ground.

Ninety One's Global Natural Resources Strategy portfolio manager Dawid Heyl⁰² says the changing balance between supply and demand could mark the beginning of a broader upcycle for agriculture equities.

Heyl invests in listed businesses connected to the agricultural supply chain, including fertiliser producers, seed companies and firms that buy, process or trade crops. He believes the pressures on farmers may eventually constrain supply enough to support prices, creating opportunities for some of the companies operating around them.

The distinction may seem subtle but is important. An investor buying a listed fertiliser producer is not making the same bet as an investor buying a farm. The former is exposed to input prices, production capacity and corporate earnings; the latter must contend directly with weather, yields, land values, labour and the cost of running an agricultural business.

Heyl's thesis rests partly on the strain already being felt by farmers.

"The stress at the farm level ... is going to be impacting supply that comes from the farm, and that's going to eventually drive grain prices higher," Heyl says.

Inputs must be purchased before harvest, while the income they generate may arrive months later. When fertiliser, diesel and financing become more expensive, growers may reduce spending or hesitate before committing to a crop.

That caution can have consequences beyond an individual farm. If producers cut back on inputs or planted area, the resulting supply response may be delayed, even when crop prices begin to rise.

"If you have a year of deficit markets... corn prices and soybean prices even trailing up 10% to 20%, I don't think that's going to be enough to incentivise a big supply response in the following year," says Heyl.

In its Material World report, Ninety One wrote that the "squeeze on farmers is not over" with diesel and fertiliser costs remaining high, and balance sheets still needing time to recover.

The report points to a market in which the pressures on production could outlast the initial shock that caused them. For Heyl, the opportunity is not that every agricultural company will benefit equally, but that a tighter supply environment could favour businesses with strong positions in essential inputs and crop markets.

"The low-cost producers in those sub-industries are going to see margin expansion and actually a bit of volume growth as well," says Heyl.

Nitrogen fertiliser, potash and seeds are some examples. Equipment manufacturers present a less certain case. Farmers whose balance sheets have been weakened by high costs may prioritise restoring cash reserves over buying new machinery, limiting the speed at which equipment demand recovers.

It is a reminder that a rise in agricultural commodity prices does not automatically benefit every company associated with the sector.

The Middle East conflict has brought that interdependence into sharper focus. Disruption to shipping and energy markets can affect diesel, fertiliser and freight, feeding into the cost of producing and moving food long after the initial geopolitical shock. The Strait of Hormuz is particularly significant to fertiliser supply, while disruption to Black Sea shipping can influence the movement of grain.

Betashares investment specialist Tom Wickenden⁰³ sees several forces converging on agricultural markets, with geopolitical disruption, rising input costs and the prospect of an El Niño weather pattern adding pressure even as underlying demand remains firm.

"I think the broad demand picture hasn't changed much, but the supply side has really been impacted quite severely," Wickenden says.

He also notes that longer-term structural trends are at play, while sudden supply shocks can have a strong influence on the sector. For investors, the distinction between structural demand and short-term disruption is central.

Population growth, rising incomes and changing diets can support agricultural demand over many years. But commodity prices can still move sharply as weather changes, trade restrictions emerge or producers respond to earlier price signals.

Those movements can create opportunities, but they can also reverse before an investment thesis has had time to play out. A fertiliser producer benefiting from a supply disruption may see that advantage diminish as trade routes reopen or production increases.

"When we expect inflation to be higher for longer, like a lot of people do for now, it can be a good way to get an equity exposure," he says.

But an allocation to the sector requires more than a belief that food will become more important. Investors need to understand whether they are buying a business with durable earnings, a commodity cycle nearing its peak, or a company whose fortunes depend on a narrow set of external conditions.

Farmland's uniqueness presents a different proposition: an asset tied to the productive capacity of the land, with returns influenced by both operating income and the value of the underlying property.

Warakirri Asset Management managing director and chief executive Jim McKay⁰⁴, who manages institutional farmland investments, argues that agriculture's appeal becomes clearer when its different industries are considered on their own terms.

Beef, for example, has benefited from strong global demand for protein and higher prices over recent years. Dairy, horticulture, nuts and berries each have their own supply dynamics, consumer markets and production requirements.

A broad view of agriculture can obscure these differences, particularly when one commodity is experiencing a downturn while another is enjoying favourable conditions.

McKay sees the long-term case for food production being reinforced by population growth across Asia and rising incomes that change what people eat. As households become wealthier, demand can shift towar