Despite the hype about food prices and the unrelenting pressures on future supply, rarely before have institutional investors built allocations to agriculture in their portfolios. SIMON MUMME examines both the direct and listed paths into the sector, and speaks to the few institutions that have put mandates ‘out to pasture’.

Agriculture presents a potentially lucrative but challenging investment case. There has been much talk of capturing attractive returns by backing the industry that will profit as the world demands more food, fuel and fibre from diminishing tracts of arable land. But despite the compelling story, few investors have bought in.

This is because the marketplace for ‘agri’ investing is immature: scarce research has been made into it, and it has attracted few investment managers. But there is data to back up the agriculture story.

The Agri Index, which measures the performance of listed Australian agricultural stocks against common index benchmarks such as the All Ordinaries, notched a whopping 79.5 per cent return against the minus 15.5 per cent return of the All Ordinaries in the year to June 30. This performance was fuelled by manufacturers in the agricultural sector, such as fertiliser companies, whose products are linked to the price of oil, says Tim Lee, director of research at Australian Agribusiness Group, which publishes the index. In total, agricultural stocks comprise 3 per cent of the All Ordinaries Index and 5 per cent of the MSCI World.

The alternative approach to the sector – investing directly in farmland or in managers operating agricultural businesses – can yield comparable returns to direct property investments and at lower risk levels than listed investments. And, since rural lots are subject to different economic forces than urban properties, they can provide some diversification within a direct property portfolio, but not the guarantee of a pure exposure to agriculture.

In a report on the sector released to its institutional clients earlier in the year, Frontier Investment Consulting looks at both approaches. Citing data from a sample survey run by the Australian Bureau of Agricultural and Resource Economics (ABARE) on the financial performance of domestic broadacre and dairy farms, the consultant finds that, among the top-quartile rankings, large farms returned 11.4 per cent, medium-sized farms returned 12.4 per cent and small farms 13.1 per cent in the 29 years to the 2005/06 financial year. In the 30 years to 2005/06, the average return from all top-quartile farms was 11.5 per cent, at risk levels similar to direct property. This compares with an 11.8 per cent return from the All Ordinaries Accumulation Index in the same time window. The survey presents, probably, the “most comprehensive analysis of farm income available in Australia,” says the consultant.

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