Investment opportunities in Western Australia’s grains ...€¦ · Financial analysis ..... 11....

Department ofAgriculture and Food

Investment opportunities in Western Australia’s grains industry:

grain producing capacity

ContentsInvestment highlights ...................................................3

Industry overview .........................................................4

Investment opportunity ................................................9

Financial analysis .......................................................11

Risk analysis ...............................................................14

Investment regulations ...............................................15

Other important information .......................................16

How to progress .........................................................17

Investment opportunities in Western Australia’s grains industry: grain producing capacity | 3

Investment highlights• The Western Australian (WA) grains industry is looking to continue its expansion to meet

growing demands for grains grown in WA which provides an exciting opportunity for investors who wish to participate in its continuing success.

• The expansion is driven by a continuing growth in productivity and the adoption of innovation and new business models that increase the volume and value of production.

• The WA Wheatbelt has provided investors with consistently positive returns. Actual returns vary season to season due to weather and prices. Over the past 14 years with rare exception, grain growing in WA has on average, generated positive returns and for well-run businesses some very high returns.

• Many grain growers have experienced returns in excess of the ASX All Ordinaries with significantly less volatility. In addition to providing positive yearly returns, every region over the past decade has also provided land owners with strong capital gains. While it is difficult to predict future capital gains there has been a long history of capital growth.

• Investors can participate in grain production capacity through a variety of different means, from outright purchase of land, joint ventures with existing grain growers or participation in investment groups. The market for land is mature and provides an established mechanism for participating in the industry.

• The returns available to an investor investing in grain production capacity vary and are dependent upon:

- Who manages the land and is responsible for business decision making.

- How the land is managed, including decisions around what crops to plant and other operational questions that can impact costs and yield.

- The risk the investor is willing to accept and the subsequent structure they use to make their investment.

- The price paid for the initial investment.

- The impacts of weather and the markets for the different grains.

• Corporate investors have increasingly become more common, with investors putting in excess of $A50 million (m) into the industry, creating a diverse portfolio of investment properties. The amount required to be invested can range from A$5m to A$50m or more.

• In recent years increased debt levels have reduced overall returns. This has limited the ability of existing land owners to continue to consolidate holdings and increase the capitalisation of their businesses. This opens up an opportunity to investors with capital to enter the market through a range of different investment modes.

Industry overviewThe Western Australian grains industry competitive advantage

• The Western Australian grains industry has lower production risk due to less rainfall variability than other parts of Australia.

Image 1 The Australian Wheatbelt and reliability of the Western Australian Wheatbelt

• In relation to infrastructure WA has lower supply chain costs in transporting grains from farms to export ports.

• The WA grain industry is internationally recognised as being clean and green. There is a strong product integrity focus and commitment from farmers right along the supply chain.

• The WA grains industry enjoys freedom from many pests and diseases present in other international grain provinces.

• In addition WA grains industry is free from mycotoxins and contaminants and residues.

• Highly skilled WA growers and farm business managers are well supported by a network of professional farm management consultants and agronomists.

Variability in wheat yields at a statistical subdivision

level 1996–2010Coefficient of variation

< 0.100.10 to 0.170.17 to 0.240.24 to 0.310.31 to 0.380.38 to 0.450.45 to 0.51> 0.51


The Wheatbelt

Image 2 Western Australian grain growing regions and export port zones

The Western Australian Wheatbelt covers approximately 9m hectares (ha), from north of Geraldton, to the south coast at Albany, east along the coast to Esperance and to the east of Merredin.

Across this vast area of Western Australia (WA), 4700 growers have built a world-leading dry climate grains province that consistently produces crops with a combined value of around $A4 billion (b).

The average farm size in WA is approximately 4500 hectares. The size of the average farm has been increasing rapidly with larger more successful farmers and corporate investors consolidating properties to drive efficiencies and employ new innovative farming methods.

The most common form of property ownership is still a single farmer or single family; however there are also cooperatives and more recently an increasing number of corporate owners.

Farms in the wheatbelt predominantly grow wheat, although there are significant amounts of barley, canola, oats, lupins and filed peas grown. Grain growers in this region often carry sheep for wool and meat on the same properties which reduces risk and can increase returns.

Recent Western Australian grains industry changes and investments

There has been significant investment activity across the Western Australian grains supply chain, especially following deregulation of the export wheat market in 2008.

There is also a competitive and well developed grain industry supply chain sector including storage and transport infrastructure, grain marketing, and suppliers of inputs – machinery, fertiliser, chemical, technology and financial products servicing WA grain growers.

Value adding businesses in WA are focused on production of malt, canola oil, oat products and lupin products.

• 1991 – Grain Trade Australia was formed to formalise commodity trading standards, develop and publish the trade rules and standardise grain contracts.

• 1992 – Mitsubishi and Davison Oilseeds establish a minimum price scheme for canola.

• 1999 – Introduction of competition in the WA domestic grain market.

• 2000 – WA grain railway network leased by the State Government – currently Brookfield is operating the ‘below rail’ part of the system.

• 2007 – Wheat Export Authority was established in preparation for partial deregulation of wheat exports.

• 2008 – Partial deregulation of bulk exports of wheat from Australia by accredited exporters.

• 2010 – Grain Pool of WA renamed to Cooperative Bulk Handling (CBH) Grain.

• 2012 – The CBH Group invests $A176 million in 574 aluminium purpose-built wagons and 22 locomotives to service the WA grains industry.

• 2012 – Kuala Lumpur Kepong Bhd has purchased 26 000 hectares of grain producing land near Dandaragan, Northampton and York.

• 2012 – Glencore acquired Viterra who trade grain in the WA marketplace.

• 2012 – Hassad Australia purchased a range of farms in WA.

• 2012 – Heilongjiang Feng Agriculture purchased 30 000 ha of land in south eastern WA, including grain storage transport and loading facilities at Albany port.

• 2012 – Bunge starts to build a bulk grain export facility in Bunbury with 48 000 tonnes (t) of capacity and permits to export up to 500 000t in the next two years.

• 2013 – Cargill Australia Limited acquired the Joe White Maltings business, including the 200 000t plant at Forrestfield.

• 2013 – Swiss-based Vitol emerged as a new buyer of WA grain.

• 2014 – Emerald Agribusiness Group sold its 50% share in Emerald Grain to Japanese partner the Sumitomo Corporation.


Market for grain producing capacity

Figure 1 Average farm size

Land

val

ue (A

$/ha

)

146%153%

200%

213%

100%40%

0

500

1000

1500

2000

2500

30002009/2011

1999/2001

Rainfall

averagelowsouth

lownorth

medsouth

mednorth

highsouth

highnorth

156%

Figure 2 Average land values per hectare

Over the past decade all areas have seen a strong increase in the value of agricultural land. On average land values have risen by 156% with some higher rainfall areas seeing capital gain in excess of 200%. Note that land prices have also fallen for periods over this time frame, particularly in areas that have suffered from greater than average reduced rainfall or poor profitability.

Hec

tare

s (h

a)

Rainfall

0

1000

2000

3000

4000

5000

60002009/2011

1999/2001

40%

23%

42%

20%

30% 41%

averagelowsouth

lownorth

medsouth

mednorth

highsouth

highnorth

32%

There is a liquid market for agricultural land throughout the wheatbelt. Properties are sold via agents and all property sales are recorded and titles issued by the state government. For the three years to the end of 2013 there were over 440 properties of greater than 800h sold across the wheatbelt.

The availability of land and prices are influenced by the relative profitability of the grower, however there are enough independent owners of land who are buying and selling property for their own purposes that there is generally a good variety of property available for investors.

The drivers of capital appreciation have been:

• consolidation of the industry. Individual farmers have been buying out their neighbours’ properties when they come on the market with the aim of taking advantage of efficiencies from better utilisation of capital equipment and labour

• acquisition of land by corporate investors. Corporate investors still hold a relatively small amount of land in comparison to individual growers but they have influenced the market in certain areas, particularly in more marginal areas where corporate investors capacity to withstand poor seasons is greater

• improved productivity and price. Over the past decade productivity and grain prices have continued to increase, although at a lower rate than some input costs. This has enabled good farmers to earn more from each hectare of land.

The market for agricultural land is expected to remain firm for the foreseeable future given:

• stable and growing demand for grains which should support current market prices

• continued consolidation of land ownership by growers and corporate agricultural investors

• increased investment in productivity research and development by the Western Australian and Australian governments and industry bodies such as the Grain Research and Development Corporation.


Investment opportunityInvestors in grain producing capacity can participate in the industry in a variety of ways. Professional investment advisors can identify the appropriate approach for each investor, given their objectives, capabilities and appetite for risk. The primary means of participating are described below:

Table 1 Investment opportunity

Investment type

Description Property management

options Types of return available to

investors

Outright purchase

Purchase of agricultural land

• Passive – owners employ a farm manager to manage the property on their behalf. The manager would make all strategic and operational decisions in-line with the investment objectives of the owner.

• Lease – the land would be leased out to other growers who would pay to have access to the land and take all the risk of producing a crop.

• Active – become actively involved in on-farm management, in particular the key decisions of what crops to plant, the application of key inputs, production hedging strategies, investment in capital equipment and use of on-farm labour.

• Profit generated by the property – as the owner of the property the investor would keep the net income from the property. Returns are highly dependent on the yield and market price for the crops grown on the property.

• Lease rental – this would be a monetary payment for use of the land. There is normally no participation in the value of crops grown on a leased property.

• Capital gain – this is only realised on sale of the asset.

Joint venture (JV)

Partnering with existing growers who already own land or for the purchase of additional land

• Passive – all operating decisions would be left to the joint venture partners with review of key decisions and results in line with the joint venture agreement.

• Lease – land is leased to third party growers who would pay to have access to the land.

• Share farming – by mutual agreement with joint venture partner, the investor would provide inputs into the venture such as: decisions around cropping, inputs such as fertilizer and seeds. The owner would also handle insurance and production hedging. All other growing activity would be carried out by the joint venture partner.

• Share in profits generated by the property – this is would be the nominal profit generated by the property less an agreed management fee for the operators of the property.

• Lease rental – this would be a monetary payment for use of the land. There is normally no participation in the value of crops grown on a leased property.

• Off-take from property production – according to the joint venture agreement an investor could take their return via physical product which they can sell or use as they wish, less an agreed management fee for the operators.

• Capital gain – this would only be realised by the sale of the land by the joint venture or the winding up of the joint venture.

Joint investment

Joining with other investors to create a pool of cash available to invest in agricultural land

• Passive – the land management fund company would manage the properties the fund has purchased. The management company may choose to employ a variety of different methods to manage the properties depending on the individual farm’s characteristics, including employing individual managers or contracting with a professional farm management company.

• Share in profits generated by the fund – this is would be the nominal profit generated by the properties owned by the fund less an agreed management fee for the operators of the fund.


Financial analysisGrowing grain in Western Australia (WA) is a profitable business. Many growers are earning at or above average stock market returns, with lower volatility.

Rainfall

A$/ha

0

50

100

150

200

250

300

averagelowsouth

lownorth

medsouth

mednorth

highsouth

highnorth

263

157

238224

206

123

202

Figure 3 Average operating return* per hectare (wheat) 2008/09 to 2012/13 *Costs exclude financing costs and personal costs. Uses average grain prices for the set period. (Source: DAFWA, ABARE)

0

100

200

300

400

500

600

700

800Depreciation

Variable costs

Fixed costs

averagelowsouth

lownorth

medsouth

mednorth

highsouth

highnorth

Rainfall

A$/ha

Figure 4 Average costs* per hectare (wheat) by region 2008/9 to 2011 *Costs exclude financing costs and personal costs. (Source: DAFWA)

-

200

400

600

Rainfall

averagelowsouth

lownorth

medsouth

mednorth

highsouth

highnorth

A$/ha

Figure 5 Impact of a variation in yield on income (+/- 25% wheat yield)

100

200

300

400

500

600

700

800Lupins

Canola

Barley

Wheat

Jan-

Mar

2008 2009 2010 2011 2012

Ap

r-Ju

nJu

l-S

epO

ct-D

ecJa

n-M

arA

pr-

Jun

Jul-

Sep

Oct

-Dec

Jan-

Mar

Ap

r-Ju

nJu

l-S

epO

ct-D

ecJa

n-M

arA

pr-

Jun

Jul-

Sep

Oct

-Dec

Jan-

Mar

Ap

r-Ju

nJu

l-S

epO

ct-D

ec

A$/

tonn

e

Figure 6 Grain prices (FOB Australia) 2008–2012 (Source: ABARES)

Variability in profitability is driven by market prices and weather, both of which are beyond the farmer’s direct control. However, there are mechanisms to mitigate the risk caused by this variability.


The profitability of each property can be positively influenced by the grower’s decisions. Making the right decisions on which crops to grow, when to seed, the level and timing of the application of fertiliser can increase or decrease relative profitability by up to 25%.

In addition, the decisions and practices that a grower employs can have a substantial impact on the costs of operating an individual property. The largest controllable costs are the application of fertiliser and weed/pest control. In both cases however there is a trade-off between reducing costs and the yield that a property can produce. (Note, the relationship is not linear.)

Large farms require access to capital equipment to successfully farm in WA. Investors will need to source access to the relevant machinery or equipment either through contract, lease or purchase.

The overall return that an investor receives will also be impacted by their financing costs and the manner in which their investment is managed.

ASX All Ordinaries real return

Volatility of real growth in wealth

Gro

wth

(% p

er a

nnum

)

From 2002 to 2011 the real rates of return on many farms in the Western Australian Wheatbelt has equalled or outperformed the Australian Stock Exchange (ASX).

Image 3 The wealth appreciation of WA broadacre farms from 2002 to 2011 (Source: DAFWA Kingwell)

Risk analysisInvesting in growing grain is not without risks. Historically returns have been positive, however there is variability in both market prices and weather, that can impact the returns an investor will receive.

The different ways of participating in the industry have different associated risks. Investing via a pooled property fund, in most instances, will be a relatively low risk way of investing, correspondingly the returns will likely be less. Conversely, purchasing land outright in marginal areas inherently carries greater risk, due to exposure to weather and market related risks.

Growers have developed a number of different mitigation strategies to reduce the impact of some of these risks. There is an active hedging market for the forward selling of production or arranging off take agreements. Also growers often grow multiple grains and some carry sheep, which lessens their exposure to the grain market, as well as having other potential benefits.

The risks involved in investing in grain production should be discussed with a qualified advisor and reflect the investment goals and objectives of the individual investor.

A risk to consider is the changing climate in Western Australia (WA). Winter rainfall (June – July) in the south-west of WA has decreased at a rate of about 20 mm per decade for the past couple of decades. Temperatures have also increased slightly. The atmosphere has become more stable over the south-west of WA, with a weakening and southward shift of winter weather systems. For growers and investors in grain production this means later starts to winter rainfall and generally drier seasons.

Gro

win

g s

easo

n ra

infa

ll A

pri

l - N

ov

(mm

)

Whe

at y

ield

to

nnes

/ha

0

100

200

300

400

500

600

700

800

Growing season rainfall

Wheat yield

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Rainfall trend line

Wheat yieldtrend line

1980

1985

1990

1995

2000

2005

2010

Figure 7 Grain yields over the south-west area of WA over the last 25 years compared to rainfall


Investment regulationsThe purchase of land or the participation in the purchase of land by a foreign national does require an application to be made to the Foreign Investment Review Board.

In addition there is a requirement to register any transaction with the State Government Land Registry and pay transfer taxes. An investor should consult with a tax professional to discuss potential tax liability.

Return

Risk

Outright purchase - marginal land active management

Outright purchase - passive investment

Property fund

Joint venture - share cropping

Image 4 Investment risk matrix

The structure of any investment could be impacted by tax regulations. All investors should consult with qualified tax professionals on the most appropriate way to structure their investment prior to investing.

Other important informationIt is extremely important that all applications for regulatory approvals are underpinned by a clear and concise intent to achieve full disclosure based on a properly developed project proposal. This is because regulators need full disclosure of all required information from a properly developed project for quick and efficient processing of an application.

A comprehensive, integrated development application could be used to attain concurrent development approval from the Local Government, Department of Environment Regulation, Department of Transport and Department of Water. This could result in the time required for a total approval process of three to six months.

The Department of Agriculture and Food, Western Australia skilled in assisting proponents to seek approvals and will work closely with proponents for the inception of the project.

The time period for all regulatory bodies to access a proponent’s application commences from the point at which they receive all the information required to make a decision in an appropriate format. This time period should not be confused with the point at which the proponent makes first contact with the regulators.

Proponents from overseas also need to comply with the requirements of the Australian Government’s Foreign Investment Review Board (firb.gov.au).


How to progress

Interested parties can contact:

Dr Mark Sweetingham Acting Executive Director Grains Industry Department of Agriculture and Food, Western Australia Phone: + 61 (0)8 9368 3298 Email: [email protected] Web: agric.wa.gov.au

Services provided by the Department of Agriculture and Food, Western Australia to assist investors in the agrifood sector include:

• Provide detailed information on opportunities.

• Assist with pre-feasibility plans to assess opportunities.

• Assist an investor to seek the Government approvals required.

• Supply contacts such as project managers, joint venture partners, financiers, immigration specialists, accountants etc.

• Access to relevant research and development information.

• Information and advice on Western Australian Government natural resource management and biosecurity legislation and regulations and the responsibilities and obligations.

• Information on Australian Government Quarantine and Export Regulation requirements.

The Grain Industry Association of Western Australia represents all interest groups across the grain supply chain in Western Australia and act as a central contact point for the industry.

Executive Officer

Phone: +61 (0)8 6262 2128 Email: [email protected] Web: giwa.org.au

The Australian Association of Agriculture Consultants of Western Australia is the professional body of WA agriculture consultants. Its members are highly qualified and experienced professionals who can assist investors to meet their investment goals. It is recommended that investors utilise their services before making any grain farm investment decisions or engaging real estate agents.

Phone: 1800 644 855 Email: [email protected] Web: aaacwa.com.au

Disclaimer

This business case provides indicative modelling on the grains industry in Western Australia. The business case and any additional information or documents that the state of Western Australia through the Department of Agriculture and Food, Western Australia (DAFWA) may supply, are to be used only as preliminary and indicative information, to be considered and used by prospective investors in the Western Australian grains industry in conjunction with other information and appropriate financial, legal, industry and other expert advice tailored to their individual circumstances and intentions. Prospective investors should conduct (or engage appropriate professional advisers to conduct) their own analysis and due diligence on any proposed investments, including the process for obtaining approvals. No part of this business case or any additional information or documents that DAFWA may supply constitutes or should be relied on as financial, investment, legal or other advice.

The Chief Executive Officer of the Department of Agriculture and Food and the state of Western Australia accept no liability whatsoever by reason of negligence or otherwise arising from any use or release of material (which in this disclaimer includes this business case, any information in it or other part of it, and any other information, advice or material, oral or written, DAFWA may supply in relation to any aspect of the Western Australian grains industry, regulation of it or investment in it) or any error, inaccuracy or omission in the material. Although reasonable care is taken to make the material accurate, the Chief Executive Officer of the Department of Agriculture and Food and the state of Western Australia do not make any representations or warranties about its accuracy, reliability, completeness or suitability for any particular purpose.

Copyright © Western Australian Agriculture Authority 2014.

ABN: 86 611 226 341

Department of Agriculture and Food, Western Australia 3 Baron-Hay Court, South Perth, Western Australia 6151 Telephone: +61 (0)8 9368 3333 Email: [email protected]

agric.wa.gov.au

Investment opportunities in Western Australia’s grains ...€¦ · Financial analysis ..... 11....

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