Rising interest rates and production costs are starting to crimp returns from corporate scale agriculture, but investors are still reaping double digit results, particularly over the longer term.
Latest Australian Farmland Index analysis of a $2 billion basket of properties operated by some of the sector's major agricultural asset managers shows annualised returns since 2015 have totalled 13.1 per cent.
That compares with returns averaging about 9pc from top Australian Securities Exchange-listed companies on the ASX200 index over the same period - a time of significant stock market highs and lows.
For the past three years the farmland index has recorded annualised returns of 11.8pc, comprising average income of 6.32pc and capital growth of 5.22pc.
The index monitors a mix of 63 broadacre cropping and livestock enterprises and permanent horticultural crop holdings producing grapes, citrus and nuts, managed by investment groups such as Growth Farms Australia, Rural Funds Management, Argyle Capital Partners and ROC Partners.
While total returns for the 12 months to September 2022 have drifted down almost two percentage points from the index's long term average to 10.3pc, the combined income recorded for the year, at 5.8pc, was only slightly below the seven-year average of 6.2pc.
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More obvious was a slowing in the capital growth valuations by the third quarter of 2022, down to 4.3pc compared with the 6.6pc return averaged since the index's inception in early 2015.
Commenting on the trends, Growth Farms Australia has noted the slowing capital growth component "was to be expected" given the strong farm asset valuation gains seen in the past three to five years as rural property prices soared.
Rising rates, costs
"It's probably reasonable to think the recent increases in interest rates will likely be a dampener to further short term rapid rises, unless we see farm income returns jump again," Growth Farms' report noted.
Given cost increases had also started constraining profits in the past year, "we think this (farm income jump) is unlikely, in the short term".
"The only possible factors likely to boost profits, and subsequently land values, would be further commodity price increases, or widespread above average seasons," Growth Farms said.
"We cannot count on either of these."
The farmland index's 5.8pc annualised income to September last year sat about midway on the range of income returns reported since 2015 - between a high of 8.5pc and a low of 4pc.
Given the index was a collection of farms from diverse sectors and agricultural regions, the summary report noted income variations of individual businesses would have been considerably higher and lower over time.
However, the "smoothing" provided by the index trend was similar to what investors could expect if they had a diverse range of agricultural investments in a portfolio.
Slow hort capital growth
Interestingly, despite the increasing popularity of horticulture as an investment class, annualised capital returns growth for the past five years have shown a bias towards farming enterprises based on annual grain cropping and livestock earnings.
While permanent crop enterprises have achieved returns of 6.2pc, annual sector properties producing commodities such as wheat, canola, beef and sheep averaged 10.7pc.
Growth Farms said one explanation for the distinct difference could be that annual enterprises covered by the farmland index had a significant exposure to land, which often represented about 80pc of their capital investment.
Such exposure meant these enterprises had benefited greatly from the recent rapid rises in land valuations.
In comparison, permanent holdings had less land and generally significant other capital investments such as irrigation networks, trees and vines, so changes in land values tended to not feed through as strongly to permanent index returns.
However, normally a lower exposure to permanent cropping land was compensated for by higher income returns, with high incomes making their mark in many horticulture crop segments in recent years.
To date the compensation adjustment had not shown up on the farmland index income results, but Growth Farms believed this was a short term anomaly which would change.
Annual farming activities are also slightly better represented in the index, where about 54pc of enterprises monitored produce broadacre annual crops and livestock.
The Australian Farmland Index is calculated by the Hong Kong-based Asian Association of Investors in Non-listed Real Estate Vehicles (ANREV) to provide information on institutional grade assets such as agriculture for professional investors to assess against other investment classes.
ANREV is part of a global alliance of non-profit real estate monitoring bodies working to provide transparency and accessibility across the non-listed real estate industry.
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Andrew Marshall
Andrew Marshall is the group agribusiness writer for ACM's state agricultural weeklies and websites. He is a former editor at The Land and has worked in various Rural Press group roles in Canberra, North Richmond (NSW) and Toowoomba (Qld).
Andrew Marshall is the group agribusiness writer for ACM's state agricultural weeklies and websites. He is a former editor at The Land and has worked in various Rural Press group roles in Canberra, North Richmond (NSW) and Toowoomba (Qld).
