The Australian Wheatbelt an Introduction for Investors

download The Australian Wheatbelt an Introduction for Investors

of 23

Transcript of The Australian Wheatbelt an Introduction for Investors

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    1/23

    The Australian Wheatbelt

    An introduction for investors

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    2/23

    All rights reserved. No part of this Report may be reproduced or

    transmitted in any form or by any means, electronic or mechanical

    including photocopying, recording or any information storage

    or retrieval system, without the prior written permission of Land

    Commodities as to the form and context in which it may appear.

    This Report is for general information purposes only. The Content

    is for the use only of the Recipient. No responsibility is accepted to

    the Recipient or any Third Party who may use or rely on the whole

    or any part of the Content.

    This Report is not intended to form the basis of a decision to

    purchase securities or any other investment decision and does not

    constitute an offer, invitation or recommendation for the purchase

    or sale of securities or any other investment. The statements and

    opinions contained in the Report are given in good faith but are

    not a substitute for further detailed analysis and independent

    enquiry on the part of the Recipient.

    Much of the Content is provided to Land Commodities by others.

    As such, Land Commodities cannot control or vouch for its accuracy

    or completeness. Land Commodities makes no representation or

    warranty as to the accuracy or completeness of the information in

    this Report. We would like to be informed of any inaccuracies so

    that we may correct them.

    Land Commodities expressly disclaims liability in negligence or

    otherwise for representations expressed or implied, contained

    in, or omissions from, this Report or any other written or oral

    communications transmitted to the Recipient or any Third Partyfor any loss or damage suffered by the recipient or any Third Party

    resulting from reliance on this Report.

    Content means any data and/or information in the Report

    and other content and documentation or support materials and

    updates relating to the Report supplied by Land Commodities.

    Land Commodities means Land Commodities Asset

    Management AG.

    Recipient means the recipient of this Report.

    Report means this Report.

    Third Party means any party other than the Recipient.

    Please direct all enquiries to:

    Land Commodities Asset Management AGBlegistrasse 9CH-6340 BaarSwitzerland

    Telephone: +41 44 205 59 70Fax: +41 44 205 59 71

    [email protected]

    Copyright Land Commodities Asset Management AG, 2012

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    3/23

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    4/23

    Introduction to the Australian Wheatbelt

    As the largest country in the world without land borders, climatic conditions across Australia vary widely from region to region. The

    desert and semi-arid central land mass makes Australia the driest continent on earth measured on an average rainfall per unit of area

    basis. By contrast, the northern part of the country has a tropical climate, varied between rainforests and grasslands.

    Most of Australias agriculture, in particular its grain production, is confined to a relatively narrow band of land to the east, south

    east and south west of the country with a temperate or Mediterranean climate, sufficient rainfall and more fertile soils.

    This area, known as the Wheatbelt (also sometimes referred to as the Grainbelt), covers only under 6% of Australias total land area

    of 7.7 million square kilometres. However, because Australia is such a large country (about 76% the land area of the United States),

    at 46 million hectares the Wheatbelt is a huge grain growing region (over three times the total land area of England, for example).

    Grain production, in particular wheat, is the most important contributor to broadacre farming profits. From an investmentperspective, commercial scale grain producing farms (or mixed livestock and cropping farms with a strong cropping emphasis) also

    generally produce less volatile returns than livestock only or perennial crop enterprises. As a result, Wheatbelt farms are often the

    focus of attention for investors in the Australian agricultural sector.

    Figure 1: Wheat growing regions of the Australian Wheatbelt

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    5/23

    Australia as an investment destinationCrops and Farming Systems in the Australian Wheatbelt

    Figure 2: Australian production ratio for grain and oilseed (2011-12 tonnage produced)

    Wheat

    Barley

    Canola

    Grain sorghum

    Oats

    Cottonseed

    Rice

    Lupins

    Triticale

    Chickpeas

    Maize

    Field peas

    Soybeans

    Sunflower seed

    Other oilseeds

    Although referred to as the Wheatbelt, farms in the region produce a range of arable crops in addition to wheat and the majority of

    farms also incorporate livestock as part of the enterprise mix. In recent years wheat accounted for over half of the land area planted

    to grains (58% in 2011-12).

    The range of arable crops grown in the Australian Wheatbelt in addition to wheat include:

    1. Coarse grains - Barley, oats, sorghum, maize (i.e. corn), triticale, millets/panicums, cereal rye and canary seed.

    2. Oilseeds Canola (i.e. rapeseed), sunflower, soybean, safflower and linseed.

    3. Pulses / legumes - Lupins, field peas, chickpeas, faba beans, vetch, peanuts, mung beans, navy beans, pigeon peas,

    cowpeas and lentils.

    Whilst wheat is usually the most reliable earner for farmers and is the mainstay of most cropping enterprises, long-term farm output

    is optimised by rotational cropping of different grain types. Crop rotation is practiced to assist with pest and disease management,enhance soil health and nutrition and spread the risk of crop failure.

    Barley (averaging 20% of grain production between 2007-08 and 2011-12) is the most common rotational crop grown as an

    alternative to wheat but the nitrogen fixing capabilities of pulses are also beneficial, with lupins being the most popular rotational

    pulse. Besides the agronomic benefits, diversifying production over different types of grains can also have the benefit of hedging

    farmers exposure to fluctuating commodity prices and stabilising farm income.

    Although most farms have a stronger emphasis on grain production (due to the higher return on capital it offers), most Wheatbelt

    farmers operate an integrated cropping-livestock farming system. This often produces a whole-farm financial outcome that is more

    effectively buffered against fluctuations in input prices, commodity prices and weather.

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    6/23

    The physical and financial stability of mixed cropping-livestock

    production systems arises from the complementary interactions

    between components of the production systems (e.g. crop waste

    can be used to feed livestock) and the fact that producers are

    afforded greater flexibility to respond to market conditions.

    Mixed systems also help in the management of weed and disease

    build-up and undesirable soil conditions such as reduction in

    organic matter content and increases in salinity and acidity. The

    resurgence of livestock prices in recent years has also helped to

    enhance the overall financial benefits.

    The optimal cropping to livestock balance varies depending on the

    specific conditions associated with each enterprise (in particular,

    with respect to soil type and rainfall). But where conditions allow,

    high intensity cropping enterprises with a greater focus on food

    and feed crops generally produce better returns. As such, farms

    with soil types allowing more intensive cropping regimes generally

    command a premium.

    Over the past two decades new crop varieties, improved machineryand agronomic management practices have allowed Australian

    farmers to increase the area sown to arable crops at the expense

    of livestock production (particularly sheep). These developments

    have also allowed a gradual migration of cropping enterprises into

    more marginal areas that would have been considered unsuited

    to crop production only 20 years ago.

    The overall impact has been a rise in the area planted to crops

    and a steady increase in grain production. The annual cropping

    area over the last decade (1991-92 to 2000-01) averaged 23

    million hectares, up from a level of 19 million hectares in the

    previousdecade. Over the same period Australias sheep herddecreased from 125 million to 88 million.

    0

    20

    40

    60

    80

    100

    120

    140

    160

    0

    5

    10

    15

    20

    25

    30

    Numberofsheep(millionhead)

    Areacropped(millionha)

    Area cropped Number of sheep

    Figure 3: Trends in cropping area and sheep numbers, 1991-92 to 2010-2011

    Australian farmland is attractiveto investors because it combinesthe benefits of first worldgovernance and stability with thescale and prices of developingnations.Citi Private Bank, Wealth Report, 2011

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    7/23

    Australia as an investment destinationClimate and rainfall in the Australian Wheatbelt

    The rainfall pattern over Australia is strongly seasonal with the summers in the south being mostly dry and hot and the winters being

    wet and cooler. By contrast, the tropical regions to the far north have wet summers with the October to April monsoon driving

    rainfall patterns in the northern part of the Wheatbelt.

    Figure 4: Climate map of Australia

    The majority of the Australian Wheatbelt averages 300 to 600 millimetres of rainfall annually with production timetables varyingfrom region to region depending on the timing of growing season rainfall. Generally, farms closer to the coast receive higher and

    more reliable rainfall, with conditions becoming drier and more volatile further inland.

    Within each of the Wheatbelt regions agricultural productivity and land prices are determined primarily by the level of rainfall.

    Hence, it is common practice for Australian farmers and agricultural investors to categorise farms according to the level of rainfall

    they receive. The three commonly used rainfall categories are:

    1. Low rainfall farms: 450 mm of annual rainfall

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    8/23

    Figure 5: Long-term average annual rainfall

    Due to the relatively low levels of rainfall over much of the

    Wheatbelt, river flows and underground water resources

    available for irrigation are minimal. As a result, almost all

    grain in Australia is produced under a dryland cropping

    system (i.e. crops are rainfed as opposed to irrigated).

    The north is home to most of Australias irrigated crop

    production (although this is predominantly cotton and sugar

    country, so much of the irrigated area would not be classifiedas Wheatbelt territory). When irrigation dams are at full

    capacity, more than 400,000 hectares can be irrigated, but

    given the high variability of rainfall in the north, irrigated crop

    production is actually more volatile over the long term than

    some of the more reliable rainfed regions of the Wheatbelt.

    Foreign investors are afforded

    exactly the same freehold

    ownership rights as Australians.

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    9/23

    Growing conditions in the Australian Wheatbelt

    The Wheatbelt is split into three agroecological grain growing regions, each with its own broadly similar climate systems and soil

    types: the northern, southern and western region. There are wide variations in the productivity of farms within each of these regions

    (primarily due to differences in the extent and reliability of rainfall), but some generalisations are still possible.

    Figure 6: Wheatbelt regions

    The Australian Wheatbelt isa vast grain growing regioncovering an area three timesthe size of England.

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    10/23

    Rainfall is the most important determinant of grain yields in dryland farming, with all three of rainfall dimensions having an

    impact:

    1. Extent - Total rainfall received in the average year.

    2. Timing - Proportion of rainfall received during the growing season; excessive rainfall damaging crops during the

    growing season; and untimely rainfall causing crop damage at harvest time.

    3. Reliability Variability of rainfall from year to year.

    It is the interaction between these factors which dictates both average yields and the annual variability of yields in different

    regions of the Wheatbelt.

    Figure 7: Major agroecological zones of the Australian Wheatbelt

    As the long-term climate maps at the end of this section show, in broad terms, the further east the more volatile and less conducive

    to yield reliability climate conditions become. Western Australia has the most reliable rainfall of any Australian state and also receives

    the highest proportion of this during the growing season. Indeed, even medium or low rainfall areas of the Western Australian

    Wheatbelt can be more reliable producers than some high rainfall areas in the south east.

    Furthermore, Western Australia also has the lowest incidence of crop damage due to summer rainfall occurring at harvest time, the

    lowest incidence of frost damage during the growing season and the lowest incidence of extreme weather events.

    As a consequence of its favourable climatic conditions Western Australia has the most reliable yields of any major grain producingstate. This is of vital importance to agricultural investors, because yield reliability (as opposed to average yield extent) is one of the

    most important factors determining farm profitability.

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    11/23

    Figure 8: Proportion of annual rainfall received during the early growing season

    Figure 9: Proportion of annual rainfall received during the late growing season

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    12/23

    Figure 10: Annual rainfall variability

    Figure 11: Early growing season rainfall variability

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    13/23

    Figure 12: Late growing season rainfall variability

    Figure 13: Harvest season rainfall variability

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    14/23

    Figure 14: Frost susceptibility

    Australias robust economy,strategic location andinvestment friendly businessenvironment have made thecountry one of the worldstop destinations for foreigninvestment

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    15/23

    Australia as an investment destinationClimate risk in the Australian Wheatbelt

    Much of the variability in Australias climate is connected with the atmospheric phenomenon known as the Southern Oscillation, a

    major see-saw of air pressure and rainfall patterns between the Australian/Indonesian region and the eastern Pacific. The Southern

    Oscillation gives rise to two major weather phenomena: El Nio, generally associated with dryer conditions in Australia, and its

    opposite twin, La Nia, generally associated with wetter conditions.

    Given the challenges of accurately predicting weather conditions over the longer term, agricultural planning and decision making is

    usually focused on the short-term; namely the current crop or pasture growing season and periods out to a maximum of one year.

    These timescales are exactly those impacted by the extremes of the Southern Oscillation - La Nia and El Nio - both of which often

    last for about 10 -12 months, and typically have the biggest impact in the Australian winter and spring; a key period agriculturally

    given the primarily winter to spring growing season of the Australian Wheatbelt.

    Figure 15: Schematic maps indicative of typical rainfall tendencies during El Nio and La Nia events

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    16/23

    El Nio

    In Australia, El Nio events are often associated with severe drought conditions. Since rainfall variability is the dominant factor

    causing year-to-year fluctuations in Australian wheat yields, El Nio is the most significant climate phenomenon with respect to

    volatility in farm operating income (and hence landowner and operator risk).

    The relationship between El Nio and Australian rainfall is particularly significant in eastern and southern parts of Australia. Whilst

    some parts of the extreme south of the western part of Australia receive below average rainfall during El Nio growing seasons, the

    risk of drought is higher in the eastern, southern and northern regions. The more extreme negative effect of El Nio on other parts

    of the Wheatbelt is the primary reason for the more reliable wheat yields achieved in the Western Australian Wheatbelt.

    Figure 16: Average growing season rainfall anomalies (deciles) during the 12 most extreme El Nio years in the last century

    In contrast to the majority of Australia, the eastern edge of the Western Australian Wheatbelt region can receive above average

    rainfall during the summer months in El Nio years. Whilst this can increase the risk of crop damage if excessive and persistent

    rainfall is received during the early summer harvest period, more often than not the effect is positive with these rains resulting in

    higher residual soil moisture which acts to boost yields by mitigating the risk of lower rainfall in the following growing season. This

    may explain the tendency of low rainfall far eastern districts in the Western Australian Wheatbelt to produce above average yields

    in some dryer years when higher rainfall districts to the west produce below average yields.

    Figure 17: Average summer rainfall anomalies (deciles) during the 12 most extreme El Nio years in the last century

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    17/23

    La Nia

    La Nia years occur with broadly similar frequency to El Nio. Although generally associated with increased rainfall, the effect on

    wheat yields can be either positive or negative depending on the extent and timing of the rainfall. If additional rainfall is experienced

    during the growing season this can have a positive impact on yields, however, if excessive rainfall results in waterlogging, or in

    extreme cases flooding, the effects can be detrimental.

    As with El Nio, the effects of La Nia differ spatially and temporally in their manifestations and impacts. Whilst some parts of the

    south west receive above average rainfall during La Nia growing seasons, the risk of flooding is predominantly associated with

    the northern, central, southern and eastern regions. Recent La Nia years include 197374, Brisbanes worst flooding of the 20th

    century, the 19982000 period which saw flooding across parts of northern and eastern Australia and the 2011 floods which

    resulted in more than AU$2 billion of damage to the agricultural sector.

    Figure 18: Average growing season rainfall anomalies (deciles) during the 12 most extreme La Nia years in the last century

    Additionally, excessive and persistent rainfall during the harvest season can damage crops, negatively impacting yields. Although

    the Western Australian Wheatbelt generally benefits from increased growing season rainfall during La Nia years, it is less likely

    than other regions to be negatively affected by flooding during the growing season or excessive rainfall during the harvest season.

    Figure 19: Average summer rainfall anomalies (deciles) during the 12 most extreme La Nia years in the last century

    Since yield reliability (rather than average yield levels) is one of the most important determinants of farm profits, rainfall reliability and

    extreme weather events have a major impact on investment returns. Historical climate data shows that for the majority of extreme

    weather years occurring in Australia over the last century, owning farms in different parts of Western Australia, as opposed to

    different parts of Australia as a whole, would have been a more effective diversification strategy from the perspective of mitigating

    climate related risk.

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    18/23

    Growing seasons in the Australian Wheatbelt

    Most of Australias grain is grown in the winter season in the temperate regions of the west, south and east, and relies on the winter

    dominant rainfall patterns in these regions. The timing of growing seasons varies from region to region and planting and harvesting

    dates can vary from year to year depending on the timing of rainfall.

    All states can commence seeding opportunistically in mid-April if there is sufficient moisture but usually farmers wait till late April

    when daytime temperatures start falling to more optimal levels. Seeding is usually finished in most regions by mid-June but some

    wetter areas can seed opportunistically well into July if required.

    The harvest commences early to mid-October in Western Australia and Queensland, with the lower rainfall farms generally starting

    earlier than the higher rainfall farms. Sometimes the harvest in Queensland can be earlier, but generally only in a poor season. Other

    states (and higher rainfall regions of Queensland and Western Australia) would get the harvest underway in late October or early

    November. The harvest in wetter years can commence as late as mid November and finalise as late as late January, but in a typicalyear most regions will be at peak harvest in mid to late November.

    State Sowing Period Harvesting Period

    New South Wales April June (ave. late May) November January (ave. mid-November)

    Victoria April June (ave. late May) October - February (ave. late November)

    Queensland April June (ave. mid-May) September December (ave. early November)

    Western Australia April June (ave. late May) October January (ave. mid-November)

    South Australia April June (ave. late May) October December (ave. mid-November)

    The summer rainfall reaching the north eastern part of the Wheatbelt varies markedly from year to year, but can allow

    opportunistic double cropping in some years. The great majority of Australian grains are, however, grown in a single winter

    growing season, with roughly 90% of Australias annual wheat harvest being winter cropped.

    Figure 20: Winter growing season by state

    There is a strong focus amongst

    investors on large scale Wheatbelt

    farms.

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    19/23

    Given the different climate in the northern part of Australia closer to the tropical climatic zone, Queensland produces the highest

    proportion of its wheat in the summer growing season (approximately half of production), with New South Wales also doing

    some summer cropping. Victoria, Western Australia and South Australia are almost exclusively winter cropping states.

    Figure 21: Comparison of average annual areas sown in the winter and summer growing season, 1991-92 to 2010-11

    0

    1,000

    2,000

    3,000

    4,000

    5,000

    6,000

    7,000

    8,000

    New South Wales Victoria Queensland Western Australia South Australia

    A

    nnualareasown('000ha)

    Winter crop Summer crop

    Australia has lower farmlandprices than any other largeagricultural exporter.

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    20/23

    Variations in farm size across the Australian Wheatbelt

    Of all farms in Australia with grain in their enterprise mix, the national average for the annually cropped area per farm is just over

    800 hectares. At 9.7 million hectares, Western Australia has the largest area of cropland of the major Australian Wheatbelt states

    (i.e. excluding Tasmania and Northern Territory). This is despite only having just over 8,000 cropping farms (i.e. farms for which grain

    is an important component of the enterprise mix), the smallest number of any Australian state.

    At an average of 1,201 cropped hectares, Western Australian farms are over twice the size of farms in South Australia (517 ha)

    and New South Wales (458 ha) and roughly four times the size of farms in Victoria (337 ha) and Queensland (270 ha).

    Alongside rainfall and yield reliability farm size is the most important determinant of farm profits. The lower land prices in

    Western Australia and the higher rate of return achieved by farms there is due in large part to the larger size of their farms.

    Figure 23: Comparison of cropping farm sizes in different Australian states, 2011

    Figure 22: Number of cropping farms and total cropland per Australian state, 2011

    0

    2,000,000

    4,000,000

    6,000,000

    8,000,000

    10,000,000

    12,000,000

    0

    5,000

    10,000

    15,000

    20,000

    25,000

    New South Wales Victoria Queensland South Austral ia Western Austral ia Tasmania NorthernTerritory

    Number of cropping farms Total cropland (ha)

    0

    200

    400

    600

    800

    1,000

    1,200

    1,400

    New South Wales Victoria Queensland South Australia Western Australia Tasmania NorthernTerritory

    Croplandperperfarm(

    ha)

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    21/23

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    22/23

    Australian Bureau of Meteorology, Historical Climate Data, 2012

    Australian Bureau of Statistics, Agricultural Land Use and Selected Inputs Data Series, 2012

    Australian Bureau of Statistics, Australian National Accounts, National Income and Expenditure Data Series, 2012

    Australian Bureau of Statistics, Crops and Pastures Data Series, 2012

    Australian Bureau of Statistics, Livestock and Livestock Products Data Series, 2012

    Australian Bureau of Statistics, Selected Agricultural Commodities Data Series, 2012

    Australian Bureau of Statistics, Value of Agricultural Commodities Produced Data Series (chain volume measure), 2012

    Australian Government Department of Agriculture, Fisheries and Forestry, Australian Bureau of Agricultural and Resource Economics and Sciences, Agricultural

    Commodities Statistics, 2012

    Australian Oilseeds Federation, Sydney

    Mason, S.J. and L. Goddard, 2001: Probabilistic precipitation anomalies associated with ENSO. Bulletin of the American Meteorological Society. 82(4), 619-638.

    McBride, J. L. and N. Nicholls, 1983: Seasonal relationships between Australian rainfall and the Southern Oscillation. Monthly Weather Report. 111(1822), 1998-2003.

    ODonnell, C 2010, Measuring and decomposing agricultural productivity and profitability change, Australian Journal of Agricultural and Resource Economics, vol. 54.

    pp. 527560.

    Pittock, A.B. 1975: Climatic change and the patterns of variation in Australian rainfall. Search. 6(11-12), 498-504.

    Potgieter, A. B., G. L. Hammer, H. Meinke, R. C. Stone, L. Goddard, 2005: Three Putative Types of El Nio Revealed by Spatial Variability in Impact on Australian Wheat

    Yield. J. Climate, 18, 15661574.

    Potgieter, A.B., G.L. Hammer and D. Butler, 2002: Spatial and temporal patterns in Australian wheat yield and their relationship with ENSO. Australian Journal of

    Agricultural Research. 53, 77-89.

    Pulse Australia, Sydney

    Ropelewski, C.F. and M.S. Halpert, 1987: Global and regional scale precipitation patterns associated with the El Nio/Southern Oscillation. Monthly Weather Review.

    115, 1606-1626.

    Stone, R.C., G.L. Hammer and T. Marcussen, 1996: Prediction of global rainfall probabilities using phases of the Southern Oscillation Index. Nature. 384, 252-255.

  • 8/10/2019 The Australian Wheatbelt an Introduction for Investors

    23/23

    t. +41 44 20 55 970

    f. +41 44 20 55 971

    [email protected]

    www.landcommodities.com

    Land Commodities Asset Management AGBlegistrasse 9

    CH-6340

    Baar

    Switzerland

    Land Commodities Asset Management AG