State by state investment analysis

of the Australian Wheatbelt

The future of buy-to-let

Reference:
LCAM/CA/30082012

Report date:
July 2012

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Confidential Report for Client use only. Land Commodities Asset Management AG, 2012

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Copyright Land Commodities Asset Management AG, 2012
2

About this Presentation

Presentation Summary
These presentation slides address four key questions for investors in Australian broadacre arable cropping farms:

1. Which regions of the Australian Wheatbelt have produced superior returns in the past?
2. Which regions currently represent the best value?
3. Which regions are most likely to produce superior returns in the future?
4. Why?

The presentation also addresses these questions from the perspective of the comparative risk profile and investment merit of the
lower rainfall districts of the Western Australia Wheatbelt.
On a regional basis, the data leads to the following conclusions:

1. The two most important determinants of investment returns in Australian broadacre farming are rainfall reliability

(more than rainfall extent) and farm size.

2. As the lower volatility in production yield and farm income in Western Australia demonstrates, the consistency of the

seasonal rainfall profile is also crucial. Regions with optimal cropping conditions are characterised by distinct wet

growing seasons (allowing maximum use of annually available moisture for crop growth) and reliably dry harvest

seasons (reducing the risk of crop damage before or during harvest).

3. Historically, capital growth has been higher with a lower level of risk over the short, mid and long-term in Western

Australia than in any other State.

4. Despite having risen more than any other State, land values in Western Australia still remain inexpensive relative to
other States.

5. The data indicates that capital growth and rental yields will continue to be higher in Western Australia than other

States for the foreseeable future.
3

With respect to the lower rainfall districts of Western Australia:

1. Although receiving lower aggregate annual rainfall, the reliable and consistent nature of this rainfall (with distinct wet

growing seasons and dry harvest seasons) produces favourable agricultural enterprise conditions.

2. Viewed in the context of the very low land prices, WAs lower rainfall districts thus present the most compelling
investment case.

3. The misconception that the higher returns are more than offset by climate risk is refuted by the reality of the relatively

low volatility in production yield and farm incomes in WAs low rainfall districts.
Data Sources
The data and analysis in this presentation comes from a range of external sources and Land Commodities proprietary agricultural
analysis tool, GAFFER (Geospatial Agriculturural and Farm Financial Evaluation Resource). The GAFFER (as we like to refer to
him) pools and analyses all geospatial data relevant to the farm investment decision making process, including climate and
rainfall data, soil type, quality, nutrient, management information, proximity to infrastructure and its impact on input and output
prices, geological and topographic data, yield and production data, farm enterprise level commercial and financial data, commodity
prices and land value trends.
By automating the analysis process, the GAFFER enables Land Commodities to quickly and cost effectively subject potential
acquisitions to rigorous, objective statistical analysis the moment new properties hit the market. The GAFFERs analysis cuts through
land agents marketing hype, irrelevant cosmetic assessments and irrational regional pricing anomalies to provide the numerical
truth about a farms true productive potential, relative value and investment merit.
Most importantly, this provides our clients with an information advantage in the negotiating process allowing us to make economical
bids for farms that other buyers miss and avoid overpaying for farms that receive undue / irrational buyer interest. In doing so, we
are able to maximise returns for our clients by exploiting the very real inefficiencies in the farmland pricing mechanism.
4

The data at the GAFFERs foundation comes from a wide range of sources, the most important of which are listed below. Its
modelling algorithms are calibrated using detailed financial and agronomic performance data collected from over 300 broadacre
farms. This benchmarking data is updated annually and covers a range of cropping and livestock only / mixed cropping and
livestock enterprises across a representative range of soil types and rainfall zones, thus allowing accurate and reliable investment
analysis and forecasting for a range of different parameters.
The GAFFERs primary data sources include:

Australian Department of Agriculture and Food

Australian Department of Commerce
Australian Department of Finance
Australian Department of Infrastructure and Transport
Australian department of Mines and petroleum
Australian Department of Primary Industries
Australian Department of Environment, Water and Natural Resources
Australian Department of Sustainability, Environment, Water, Population and Communities
Australian Department of Climate change
Australian Bureau Of Statistics
Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES)
Australian Bureau of Meteorology
Australian Bureau of Infrastructure Transport and Regional Economics
Government of Australia Geoscience Agency
Australian Bureau of Resource and Energy Economics
Department of Agriculture and Food of the Government of Western Australia
Western Australian Land Information Authority
The Co-operative Bulk Handling Group (leading grain marketing and logistics cooperative handling 95% of the Western
Australian grain harvest)
5

Figure 1: Wheatbelt regions

Figure 2: Wheatbelt climatic regions

Figure 3: Long term average annual rainfall

Figure 4: Early growing season rainfall

Figure 5: Late growing season rainfall

10

Figure 6: Annual rainfall variability

11

Figure 7: Early growing season rainfall variability

12

Figure 8: Late growing season rainfall variability

13

Figure 9: Harvest season rainfall variability

14

Figure 10: Frost susceptibility

15

Figure 11: Climate change

16

Figure 12: Variability in Wheat yields, Australia - 1994 to 2009

17

Figure 13: Variability in Wheat yields, Western Australia - 1994 to 2009)

18

Figure 14: Relationship between property size and price, 300 mm to < 400 mm rainfall zone of Western Australia (properties on the market in

Q4 2011 >AU$2M list price per farm)

4,500

5,000

4,000

4,500
4,000
3,500

3,000

3,000
2,500
2,500
2,000
2,000
1,500

Croppable ha

AU$ / Croppable ha

3,500

1,500

1,000

1,000

500

500

0
AU$ / Croppable ha

Croppable ha

19

8,000

7,000

7,000

6,000

6,000

5,000

5,000

4,000

4,000

3,000

3,000

2,000

2,000

1,000

1,000

Croppable ha

AU$ / Croppable ha

Figure 15: Relationship between property size and price, 400 mm to < 500 mm rainfall zone of Western Australia (properties on the market in Q4

2011 >AU$2M list price per farm)

-1,000
AU$ / Croppable ha

Croppable ha

20

Figure 16: Relationship between property size and price, 500 mm to < 600 mm rainfall zone of Western Australia currently (properties on the

market in Q4 2011 >AU$2M list price per farm)

7,000

5,000
4,500

6,000
4,000
3,500
3,000

4,000

2,500
3,000

2,000

Croppable ha

AU$ / Croppable ha

5,000

1,500

2,000

1,000
1,000
500
0

0
AU$ / Croppable ha

Croppable ha

21

Figure 17: Relationship between property size and price, 600 mm rainfall zone of Western Australia (properties on the market in Q4 2011

>AU$2M list price per farm)

18,000

1,600

16,000

1,400
1,200

12,000

1,000

10,000
800
8,000
600

6,000

Croppable ha

AU$ / Croppable ha

14,000

400

4,000

200

2,000
0

0
AU$ / Croppable ha

Croppable ha

22

Figure 18: Average area cropped and wheat area cropped in 2010
2,500

Area per farm (ha)

2,000

1,500

1,000

500

0
New South Wales

Victoria

Queensland
Total area cropped

South Australia

Western Australia

WA: Low rainfall

Wheat area
23

Figure 19: Change in average area cropped per farm over time (last 20 years)
2,500

Area per farm (ha)

2,000

1,500

1,000

500

0
1991

1993

New South Wales

1995
Victoria

1997

1999

Queensland

2001
South Australia

2003

2005

Western Australia

2007

2009

WA: Low rainfall

24

Figure 20: Long and mid-term average wheat yields

1.80

1.60

1.60

1.60

1.56
1.49

1.40

1.57

1.42
1.34

1.35

1.34

1.29

1.28

1.20

Annual yield (t/ha)

1.54

1.00

0.80

0.60

0.40

0.20

0.00
New South Wales

Victoria

Queensland

South Australia

10 year (2001-2010)

5 year (2006-2010)

Western Australia

WA: Low rainfall

25

Figure 21: Average annual wheat yields - New South Wales

3.50
3.00

Annual yield (t/ha)

2.50
2.00
1.50
1.00
0.50
0.00
1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

26

Figure 22: Average annual wheat yields - Victoria

3.50
3.00

Annual yield (t/ha)

2.50
2.00
1.50
1.00
0.50
0.00
1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

27

Figure 23: Average annual wheat yields - Queensland

3.50
3.00

Annual yield (t/ha)

2.50
2.00
1.50
1.00
0.50
0.00
1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

28

Figure 24: Average annual wheat yields - South Australia

3.50
3.00

Annual yield (t/ha)

2.50
2.00
1.50
1.00
0.50
0.00
1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

29

Figure 25: Average annual wheat yields - Western Australia

3.50
3.00

Annual yield (t/ha)

2.50
2.00
1.50
1.00
0.50
0.00
1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

30

Figure 26: Wheat yield volatility (last 20 years)

45%

40%
40%
38%

Standard deviation (% from mean yield)

35%

30%

31%
28%

25%

25%

20%
18%
15%

10%

5%

0%
New South Wales

Victoria

Queensland

South Australia

Western Australia

WA: Low rainfall

31

Figure 27: Years with wheat yields > 20% below average (last 20 years)
7

Number of years

0
New South Wales

Victoria

Queensland

South Australia

Western Australia

WA: Low rainfall

32

Figure 28: Change in farm EBITDA before payment of lease

125,264

150,000

74,010

50,000

95,079

100,000

85,126

AU$ per farm annually

200,000

236,295

214,015

250,000

0
New South Wales

Victoria
20 year average

Queensland
10 year average

South Australia

Western Australia

WA: Low rainfall

5 year average
33

Figure 29: Change in farm operating margins before payment of lease

40%

35%

Pre-lease EBITDA / Total farm revenue

30%

31%
28%

28%

28%

27%

25%

22%

20%

15%

10%

5%

0%
New South Wales

Victoria

Queensland

20 year average

South Australia

10 year average

Western Australia

WA: Low rainfall

5 year average
34

Figure 30: Volatility in farm operating margins before payment of lease

30%

26%

Standard deviation (% variation from mean)

25%

22%
20%

21%

21%

18%
16%

15%

10%

5%

0%
New South Wales

Victoria

Queensland

South Australia

Western Australia

WA: Low rainfall

35

Figure 31: Change in average EBITDA per hectare before payment of lease
120

Average annual pre-lease EBITDA (AU$ / ha)

100

80
74
68
60
54
40

44

42

24

20

0
New South Wales

Victoria

Queensland
Last 20 years

South Australia

Last 10 years

Western Australia

WA: Low rainfall

Last 5 years
36

Figure 32: Change in income as a % of farm value over time (last 20 years)
9.0%

8.0%

8.2%

7.3%

7.0%

Pre-lease EBITDA / farm value

6.8%
6.0%
5.9%

5.7%
5.0%

4.0%

5.0%
4.5%
3.9%

3.7%

3.5%

3.0%
2.9%

2.9%

2.0%

1.0%

0.0%
New South Wales

Victoria

Queensland
10 year average

South Australia

Western Australia

WA: Low rainfall

5 year average
37

Figure 33: Volatility in farm income as a % of farm value (last 20 years)

50%
48%

Standard deviation (% from mean pre-lease EBITDA / farm value)

45%

44%

44%
40%
40%

39%
35%

32%

30%

25%

20%

15%

10%

5%

0%
New South Wales

Victoria

Queensland

South Australia

Western Australia

WA: Low rainfall

38

Figure 34: Number of bad years (last 20 years)

Number of years with farm income as a % of farm value < 5%

12

10

10
9

4
3

0
New South Wales

Victoria

Queensland

South Australia

Western Australia

WA: Low rainfall

39

Figure 35: Average income as a % of farm value in bad years (last 20 years)

Average income in years with farm income as a % of farm value < 5%

4.5%

4.0%
3.8%

3.9%

3.9%

Western Australia

WA: Low rainfall

3.7%

3.5%
3.3%
3.0%

3.1%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%
New South Wales

Victoria

Queensland

South Australia

40

Figure 36: Average income as a % of farm value in good years (last 20 years)

Average income in years with farm income as a % of farm value > 5%

14.0%
13.3%
12.0%

10.0%
9.7%
8.6%

8.0%

8.2%
7.4%
6.5%

6.0%

4.0%

2.0%

0.0%
New South Wales

Victoria

Queensland

South Australia

Western Australia

WA: Low rainfall

41

Figure 37: Growth in land values since 1990

250%
200%
150%
100%
50%
0%
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

-50%
-100%
New South Wales

Victoria

Queensland

South Australia

Western Australia

42

Figure 38: Average annual growth in land values since 1990

12.0%

10.8%
10.0%

8.0%

6.9%
6.0%

5.2%
4.0%
3.3%
2.7%

2.6%

2.0%

0.0%
New South Wales

Victoria

Queensland

South Australia

Western Australia

WA: Low rainfall

43

Figure 39: Average 5 year growth in land values since 1990

60%

50%

51%

40%
38%

30%

20%

31%

22%

22%
17%

10%

0%
New South Wales

Victoria

Queensland

South Australia

Western Australia

WA: Low rainfall

44

Figure 40: Average 10 year growth in land values since 1990

140%
131%
120%

100%

80%

81%
76%

60%
54%
40%

43%

42%

20%

0%
New South Wales

Victoria

Queensland

South Australia

Western Australia

WA: Low rainfall

45

Figure 41: Number of occasions that land values have fallen since 1990
10

Number of years

0
New South Wales

Victoria

Queensland
1 year period

5 year period

South Australia

Western Australia

WA: Low rainfall

10 year period
46

Figure 42: The three lowest 5 year periods of land value appreciation since1990
30%

20%
16%

10%

3%

0%
-6%

New South Wales

Victoria

Queensland

South Australia

Western Australia

WA: Low rainfall

-10%

-20%
-26%
-29%

-30%
-35%

-40%

47

Figure 43: The three lowest 10 year periods of land value appreciation since1990
70%

60%
54%

50%

40%
35%

30%

20%

10%

0%
-6%

-10%

-20%

New South Wales

Victoria

-11%

Queensland

South Australia

Western Australia

WA: Low rainfall

-20%
-24%

-30%

48

Figure 44: 2010 value of land and fixed improvements

2,500

2,249

Land and fixed improvements value (AU$/ha)

2,000

1,664
1,500
1,379
1,219
1,000

1,008

759
500

0
New South Wales

Victoria

Queensland

South Australia

Western Australia

WA: Low rainfall

49

Figure 45: Ability to pay rent (last 10 years)

10
9
8
7
6
5
4
3
2
1
0
New South Wales

Victoria

Queensland

South Australia

Western Australia

Number of years when average farm pre-lease EBITDA less than rent
Number of years when average farm pre-lease EBITDA greater than rent
50

Land Commodities Asset Management AG

Blegistrasse 9
CH-6340
Baar
Switzerland
t. +41 44 20 55 970
f. +41 44 20 55 971
info@landcommodities.com
www.landcommodities.com

Land Commodities Asset Management AG