Agriculture doesn't have a great reputation as an investment destination, but that may be about to change.
According to the UN Food and Agriculture Organisation, global food production must double by 2050 to feed the world's growing population. This must be achieved while arable land, particularly in developed countries, is in decline.
Urbanisation, salinisation, desertification, and general overuse all contribute to decreasing either the total area of arable land available, or the productivity of land in use. Add to that the suggested impacts of climate change and shifts in water availability, and you can see a compounding challenge ahead for food and fibre production.
The growing world population means much needs to be achieved with a shrinking, finite arable resource base. As my father says, "they're not making any more land". All of this combined must have upward pressure on quality farmland prices over the long term.
A property trust with a difference
If you can spot an investment thesis here, but don't know the first thing about farming, allow me to introduce a property trust with a difference.
Rural Funds Group (ASX: RFF) owns a diverse portfolio of agricultural assets worth over $260 million. Property and infrastructure comprise 54% of the portfolio, biological assets (plants and livestock) 26%, water entitlements 15%, and the final 5% are in other assets.
The company's property portfolio is predominantly in poultry farms, vineyards and almond orchards. Its recent expansion efforts have focus on almond orchards. This comes as no surprise given the drought crippling California (home to 80% of global almond production), benefiting Australian companies like Select Harvests (ASX: SHV). It's likely Rural Funds Group will invest further in almonds.
Exposure, without the risk
Interestingly, RFG owns and leases its assets, rather than operating them. It thereby avoids much of the volatility and uncertainty of agricultural commodity prices.
Similar to commercial or industrial property, RFG's leases are largely 'triple net', meaning the tenant is responsible for property expenses over and above rent fees. Tenants include one of Australia's largest poultry producers, Baiada, plus ASX-listed companies Select Harvests and Treasury Wine Estates (ASX: TWE).
RFG's weighted average lease expiry sits at 12.9 years. A proposed almond orchard deal with Olam Australia looks set to extend this to 15.7 years. Each lease contains an indexation clause (generally at inflation), plus market review mechanisms.
The business pays quarterly distributions. The 2016 forecast distribution of 8.93 cents per share implies a yield of around 8%, with the potential for further long-term capital appreciation. (Australian agricultural land prices have appreciated at over 5% per annum for the past 30 years.)
While many ASX-listed property trusts trade above their book value, RFG is priced roughly in line with its $1.15 book value (per share). However, this number understates the true value of the group's water entitlement assets.
In accordance with accounting standards and ASIC guidance, water entitlements are recorded at cost in statutory accounts. When adjusted to current market rates, the book value jumps to $1.22, putting RFG shares at a small discount to the value of its underlying assets.
Rural Funds Group is Australia's only listed diversified agricultural property trust, consequently the investment and the asset class is unfamiliar to many investors. It's widely accepted that agricultural assets have a low correlation to more popular asset classes, therefore providing a strong portfolio diversification opportunity.
