This is not good news if you are a local farmer trying to expand!
The Australian Farmland Index which monitors 57 corporate farms across Australia recorded a 16.89 percent total return for the 12 months to March 2017. This was made up of income returns of 8.06 per cent and capital growth of 8.42 per cent.
Demand from the corporate sector is set to continue based on these strong results.
A combination of increased equity from higher land values and a low interest rate environment is encouraging farmers to compete with corporates.
What are the options for farmers looking to expand?
If you can’t beat them, join them!
Our advice – proceed with caution.
One of the key requirements for success is scale, but joining forces with a corporate is on the face of it the least preferred option. Approach with caution, but there are a few different ways to set this up if such an opportunity presents itself.
Take the punt and gear up!
Your equity has increased, balance sheet is strong, low interest rates and banks are keen to hand out the cash. It comes down to what your long term plan is. If it’s the farm next door you probably need to have a crack at it.
Sit on the fence (and wait for the correction)
It’s important not to get caught up in the ‘hype’ of the agri sector ‘boom’. Depending on your circumstance and predictions for the future, it might pay to sit on the fence and see what happens. History has shown that land values increase then flatten out. Very rarely do land values decrease. However maybe this is a perfect storm made of inflated land values, low interest rates and over leveraged balance sheets.
Take advantage of investor funds available
Scale is important. Land ownership is normally preferred but not essential. There are other options such as lease or share farm. There is money around looking for a safe home. Farm land provides this. Lease rates will normally be somewhere between 2.5 percent and 4 percent. Plus an investor has the opportunity for capital growth. We encourage leases with a lower return but a share of profit if average or above returns are achieved. It’s an education process with the investor to understand that the farmer needs an opportunity to invest in the farm and maximize returns rather than the investor focusing on the highest lease return possible. One of the main criteria for working with an investor is an exit strategy (for the investor). This might be 5, 7 or 10 years time. An investor needs to know how they will exit the investment.
If you are a seller, what are the options?
If you are considering a sale in the next few years the current demand for farm land may help make a decision. In most selling scenarios it is as much an emotional decision as a financial decision. For a seller the reality can be what to do with the sale proceeds. Where better to leave part of the funds than invested in farm land? Take some cash and buy a house etc elsewhere and leave funds invested in the land. There may also be the opportunity to stay living on the land until you are ready to leave. If you are a seller consider working with a local farmer to come up with a plan and a solution that works for both parties.
Other investment options
You have plenty of equity and interest rates are low. Maybe consider other investment options. Once again it come back to your plan. It may be to invest elsewhere which may include in the agri industry. There are plenty of options available.
The ag sector is going through a boom. But as we know this can change quickly. The corporate / super fund sector are in many respects driving the bullish land values. There are many reasons for this including our proximity to Asia and land values comparative to other parts in the world. If you are a farm family and business looking to expand, there are options. It’s a matter of being ready and open to opportunities.
Chris has the formal qualifications of Chartered Accountant but attributes much of his knowledge and experience to growing up on a busy farm and being part of building the Mulcahy & Co business. Chris’s day to day focus is to lead the team and deliver on Mulcahy & Co’s core purpose – to help clients achieve financial security.