FEATURE | Agriculture: Golden soil

These are matters of international commodity agreement, unpredictable decisions by controlled economies and political decisions, along with the "flukes of world politics."

"The best Australia can do is to hope that the bottom does not drop out of all the foodstuff markets at once and to encourage shifts in food production where they are possible," he wrote.

Sixty-one years later, the bottom has not dropped out of the "foodstuff" markets and Australia remains as prosperous as ever, particularly as it weathers the motherload of political matters: US President Donald Trump's tariffs and trade war.

"Generally, the Australian ag community sees the tariffs as a positive in the long term because we're seen as a stable, reliable partner and we will continue to have very stable, reliable production," Warakirri chief executive Jim McKay says.

"We are seeing a realignment of where Australia's trade is going, and agriculture is an important part of that."

Australia's crop production and livestock notably are poised to benefit substantially from that. The nation is a net exporter of food, shipping off about 71% of its agricultural production, according to the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES).

What makes agriculture investors so optimistic is the insatiable demand for the produce, particularly from Australia's largest trading partner - China.

"Food is a basic necessity. It's like water finding its way through a maze - it'll eventually find a home. What the tariffs have done is provide a bit of short-term dislocation. The demand for food doesn't go away. It will just come from a different place," says McKay.

Aitken Advisory founder James Aitken says Australia is "blessed" with resources and endowments that the world wants.

"One country, in particular, has wanted them all for a long, long time. We know that, and we have benefited massively from that," he told the recent Citi Australia and New Zealand Conference.

In 2023, China was Australia's largest export destination by far, offloading mostly an abundance of iron ore and bringing in about $143 billion to the economy, according to the Observatory of Economic Complexity. Aitken theorises that China's President Xi Jinping is slowly moving the economy away from being almost entirely reliant on property to creating an "equity culture" slowly, steadying China to underwrite household balance sheets and household confidence.

"If that occurs, then how much of our stuff do they need into perpetuity? We shall find out," Aitken says.

The industry is confidently bullish about the global demand for food, particularly protein.

One such case is AAM Investment Group, which has about $1 billion invested in beef cattle, lamb, cropping and poultry. Founder Garry Edwards is betting big on developing nations' demand for a range of proteins.

"Getting protein in a human's diet earlier starts off as milk protein, then it moves into cereal proteins, and it moves ultimately into animal meat proteins which starts with white meats, and it hits a pinnacle of red meat," he recently told the AgriCoach podcast.

In economic theory, Bennett's Law states that as people earn more money, become less poor and move into the middle class, they tend to move away from starchy foods such as sorghum, millet, cereals and rice, and eat more protein-based food, fruits and vegetables.

Studies on exactly how much the poor spend on food once their income goes up are few and far in between. That is until last year when University of Minnesota applied economics professor Marc Bellemare and his colleagues produced what is touted to be the most credible test of Bennett's Law.

Their analysis of government cash transfer programs in the Philippines, Mexico, Uganda and Nicaragua saw a 12% to 23% boost in citizens' annual income. They calculated that income elasticity of food expenditures to be 0.03. In other words, for every $1 in income, three cents was spent more on food.

While this might not seem much, this holds substantial meaning in the context of the growing middle class, especially in China, which eradicated extreme poverty in 2020, according to the World Bank. Since 1978, about 800 million people lifted out of abject poverty.

"We have this enormous population in the world that can't produce their own food, and we have an inhabited country with a massive landmass that's frankly massively under invested," says Edwards.

Something different

Agriculture is unique and, in many ways, more multi-faceted compared to other asset classes.

Selling agriculture to investors requires getting into their "hearts and minds," says Edwards.

"There's an emotional engagement that creates the passion of why you do what you do. You don't do this purely because of the financial outcome. There's a bigger mental buy-in that's involved in this process," he says.

In other words, agricultural investors want to invest in something that is tangible and "real" and is not sold from a spreadsheet or promises a "hypothetical outcome."

Harrison Stewart, a senior investment analyst at Prime Value, says investment returns in agriculture are driven by two main factors.

"The key one is capital appreciation - location, rainfall, irrigation capacity and soil type. All those flows into what you're able to produce, and typically high-value land is in areas where there is more certainty around rainfall and irrigation and productive capacity, versus areas where it might be a little more marginal," he says.

Expensive properties in Queensland and Northern Territory, with millions of acres, for example, have a very low dollar per acre value because they're not overly productive. Tasmania, Stewart says, has places that sell for $30,000 per hectare.

The second return driver is operational performance. To have a viable dairy farm, Stewart calculates the starting purchase price to be in the realm of $5 million. The cost of livestock and staff and operations are stacked on top of that.

The Prime Value Dairy Trusts own everything from cows to machinery and employ staff directly.

"It's a daily production cycle - cows go in and out twice a day then you have to keep your grass lush and the cows healthy. There is a lot that goes on. For many people, it's very hard to get into. We see our platform as something where investors can benefit from positive underlying thematics without the headache of the day-to-day challenges that come with it," he says.

Ballarat-based RSM financial adviser Kate Tierney, who specialises in providing financial advice for agri-clients, says bigger domestic factors are at play when it comes to the profitability of the sector, casting aside the noise of Trump's tariffs.

"It's been very dry in southwest Victoria in particular. It has rained down here and commodity prices have been incredibly strong in part because of restocking activity and production hit. That means that, basically, demand stays the same and supply is decreased. So, what happens to your price? It goes up," she explains.

Stewart says: "Weather is fundamentally ag's biggest risk, and it's one that you're not able to mitigate. That's why you see premiums paid for land that is in areas with high rainfall or the ability to irrigate, which might be from a river or an underground reserve, or even extracting the water and spreading it on the land through different methods. It takes away the risk the rain doesn't come and mitigates the impact of drought as much as possible."

That is why Tasmania, he adds, has the highest land values in Australia because it has the highest rainfall.

Tierney notes that unlike a typical advised-client, agri-clients weather the unpredictability in income and revenue given they are price takers and not price makers.

"Like with any bulk commodity, you don't make your market. You're at the whims of markets," she says.

The bulk of her clients operate in cropping or livestock, such as sheep or beef cattle (as opposed to dairy cattle). Some have a cross-section of enterprises.

"Agri-clients on paper have quite a large amount of wealth, and I work with them to get the most out of that wealth. Often agri-clients come to us because they want to diversify their asset base a little and potentially build some wealth off farms," Tierney says.

"As an adviser, we have to absolutely know the business and their needs and then drive home what we can provide as alternatives if they choose to invest off-farm rather than back into their business."

When it comes to living and working on the land, the emotional stakes are high and inextricable. Edwards often sees farmers and breeders blurring the lines and if they are doing it for emotional, lifestyle or business reasons.

"Is your business becoming your lifestyle? I'm not saying that's a bad thing. I'm just saying you need to be aware of it," he says.

He often meets farmers who no longer own assets, sensing that they weren't willing to adapt with the times.

"Because at some point in time, it becomes this lifestyle. Now, if that's what you want, great, but if you want succession planning, growth and integration you've got to be prepared to work out what part of this is business and what part of this is that lifestyle experience," he says.

Open spaces

Between 2020 and 2023, Australia's agricultural land prices grew an astronomical 79% on a median price per hectare, Rabobank estimates, driven by a confluence of factors such as lower interest rates, heightened demand from institutional investors and limited supply.

In 2024, though, farmland prices contracted with the median price per hectare across all agricultural land types decreasing by 6% on the prior year. Foreign investors' interest also cooled off during the period.

Rabobank commodities analyst Paul Joules says in 2023-24, foreign investment declined 38% year on year, with offshore capital inflows totalling $5.3 billion, making this the largest yearly drop in percentage terms in 14 years.

The pullback seen in overseas investment also reflects a drop in overall corporate investment activity in Australian agriculture, he writes in the Australian Farmland Price Outlook report.

"This is particularly notable in the dairy space, where we are coming off a period of high profitability, with returns beginning to normalise," Joules says.

"This has likely taken the steam out of investment, and it could spell a return to more modest investment growth in the years to come."

Many offshore investors see golden opportunities in Australia's agriculture sector. There are plenty of reasons why they want a piece of it.

Right off the bat, farmland can generate about 9% in returns annually, the Asian Association for Investors in Non- Listed Real Estate Vehicles (ANREV) figures show.

Foreigners are also attracted to qualitative factors like the country's political stability, transparency, healthy workforce and legal framework.

A Bloomberg Media study recently ranked Australia third in net foreign direct investor confidence in the Asia Pacific most notably for its natural resources and efficient institutions.

"One of the reasons we get a lot of interest from offshore is because we are a very efficient and very transparent agriculture market. Yet, there's still lots of capacity for us to grow. The value of our land relative to productive capacity is some of the most attractively priced in the world," McKay says.

"This is why we get lots of foreign investors from Canada, North America, Europe, the UK and China."

According to the Australian Taxation Office (ATO), of the country's expansive 369 million hectares, only 13% was owned by foreigners in 2023. China and the UK top the leaderboard with 2.1% and 2% respectively, followed by Canada with 0.8%.

"But domestically, we underplay the agriculture sector. I think partly it's because we don't get a lot of exposure to it," McKay points out.

He estimates that the ASX only has about 1% exposure to agriculture and as a sector, it represents about 5% of the total economy.

"So, to get exposure to agriculture, you need to invest directly," he says.

"Australia does not have the kind of subsidies that Europe or the US have. So, the Australian agriculture community has had to become very efficient in terms of its production. In many sectors, we're world class because we've had to become very efficient and innovative in the way we grow commodities and crops."

Institutional investors' appetite for agriculture is evident, yet superannuation funds' interest appears lukewarm at best.

Warakirri has been managing a large portfolio for a local pension fund for 30 years, which McKay says is a top performer, particularly in the last decade, and produces low levels of volatility.

"I wouldn't say that the pension funds or Australian superannuation funds don't invest in ag, it's that we haven't seen a lot of it more recently," he says.

What has taken off, though, is investments in opportunities like forestry, which are linked to climate change and ideal for investors who want to take advantage of potential carbon offsets and credits.

McKay admits there are indeed some barriers for investors eyeing agriculture that make them reluctant to go all in.

"The performance test and RG97 - both of those create headwinds for pension funds to think about agriculture as an investment," he says.

ASIC is reviewing super funds' disclosure of upfront costs under RG97, specifically stamp duty, when buying real estate.

Currently, super funds must disclose all transactional and operational costs associated with an investment. Unlisted property assets must disclose stamp duty costs as a transaction cost and are treated as a management fee, making it appear as though the investments are more expensive on paper. Conversely, in listed property such costs are rolled into the overall fee disclosure.

Any reforms ASIC rolls out will also impact agricultural investments as evidently, super funds have expressed their desires to allocate more to unlisted property types.

"The performance test doesn't have a benchmark for agriculture in it," McKay adds. "Therefore, it means that if a pension fund is thinking about investing in agriculture, it's going to take off-benchmark risk. What you're going to get is a misalignment of the benchmarks compared to and that can create risk that a superannuation fund doesn't want to take."

Play to your strengths

Horne was quite critical of Australia when he wrote The Lucky Country, stating it is a country "run mainly by second-rate people who share its luck."

He describes the country as "provincial" in which most of its activities are derivative and most new ideas are taken from abroad, calling out the lack of "great innovation" or originality.

Horne made grave predictions about the manufacturing sector. He said that the "main decisions in manufacturing and strategy are dominated by overseas centres and in which vogues are usually out of date."

"But as the present technological revolution passes into new forms Australia may be left behind. It may not understand what is happening or have the skills to implement new techniques," Horne says.

He prophesised a "great tendency for overseas firms to buy up Australian firms" and that Australia could end up as an "economically colonial country again" via the manufacturing industry.

The latter, unfortunately, has held up to this day. Australia lives much off unrefined exports as its manufacturing sector languishes amid structural challenges in the form of high labour and input costs, workforce shortages and stiff global competition.

Ai Group found that after two years of healthy growth following the pandemic, business conditions took a "sudden turn for the worse" when the manufacturing sector entered a recession in mid-2024 and contracted 2.6% over the last year.

"While weak economic conditions in Australia have proven difficult for most industries, manufacturing has declined faster and further than any of its peers," Ai Group said.

Bruised by the pandemic, which saw manufacturer input prices rise by a whopping 37.5%, as well as the Russia-Ukraine war, which jacked up global energy prices, the local manufacturing sector hangs by a thread.

"Manufacturers will struggle to make the investments needed to raise productivity while their balance sheets are weakened by high energy prices, and they cannot recruit the technical specialists required for technology projects," Ai Group said.

"With recession conditions already in play and the risks of the trade war looming, now is the time to urgently address these issues confronting our manufacturing sector."

Six decades since the book was published, Australians flipped Horne's critiques and embraced the adage 'The Lucky Country' as part of their national and economic identity.

Horne worried that among advanced countries, food production was constantly improving and that Australian foodstuff producers were becoming less relevant because its position as a supplier seemed in danger.

The agriculture sector of today will tell Horne that he had nothing to worry about.