Download Figure 7 Grain yields continue to improve despite winter rainfall

Supporting your success
Investment opportunities in Western
Australia’s grains industry:
grain producing land
Table of Contents
Investment highlights ............................................................................................................ 2
Industry overview .................................................................................................................. 3
Investment opportunity .......................................................................................................... 8
Financial analysis ................................................................................................................ 10
Risk analysis ....................................................................................................................... 13
Investment regulations ........................................................................................................ 14
Other important information................................................................................................. 15
How to progress .................................................................................................................. 16
Disclaimer ........................................................................................................................... 17
Supporting your success
Investment highlights
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The Western Australian (WA) grains industry is looking to continue to expand to
meet growing demands for grains grown in WA and 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:
o Who manages the land and is responsible for business decision making.
o How the land is managed, including decisions around what crops to plant and
other operational questions that can impact costs and yield.
o The risk the investor is willing to accept and the subsequent structure they use
to make their investment.
o The price paid for the initial investment.
o The impacts of weather and the markets for the different grains.
o In recent years, corporate investors have 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.
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Industry overview
The Western Australian grains industry competitive advantage.
Image 1 The Australian Wheatbelt and reliability of the Western Australian
Wheatbelt.
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The Western Australian (WA) grains industry has lower production risk due to
less rainfall variability than other parts of Australia.
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 all 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.
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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.
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Recent Western Australian (WA) grains industry changes and
investments
There has been significant investment activity across the Western Australian (WA)
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.
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1991 - Grain Trade Australia (GTA) 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 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 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 (KLK) 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 (HFA) 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 of capacity and permits to export up to 500,000 tonnes 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 in 2014 - Emerald
Agribusiness Group sold its 50 per cent share in Emerald Grain to Japanese
partner the Sumitomo Corporation.
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Market for grain producing capacity
Figure 1 Average land value per hectare
Figure 2 Average farm size
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
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fallen for periods over this time frame, particularly in areas that have suffered from
greater than average reduced rainfall or poor profitability
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:
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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:
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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.
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Investment opportunity
Investors 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
Property management
options
Description
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Outright
purchase
Purchase of
agricultural land
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Partnering with
existing growers
Joint venture who already own
(JV)
land or for the
purchase of
additional land
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Types of return available
to investors
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 onfarm 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.
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 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
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Investment
type
Property management
options
Description
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Types of return available
to investors
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.
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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
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properties depending on
the individual farm’s
characteristics, including
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employing individual
managers or contracting
with a professional farm
management company.
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.
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.
Off-take agreement for
production from fund
owned land.
Capital gain – this
would be realised upon
departure from the
fund or via a capital
distribution by the
fund.
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Financial analysis
Figure 3 Average income per hectare (wheat)
Figure 4 Costs per hectare (wheat)
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Figure 5 Impact of variation in yield on income
Figure 6 Grain prices 2008-2012
Growing grain in Western Australia (WA) is a profitable business. Many growers are
earning at or above average stock market returns, with lower volatility.
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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.
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 farm from 2002-2011
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Risk analysis
Investing 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.
Figure 7 Grain yields continue to improve despite winter rainfall having declined over
the South-West area of WA over the last 25 years.
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Investment regulations
The 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.
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.
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Other important information
It 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 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 3-6 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 is in an appropriate format. This time period should not be confused with
the point at which the proponent make’s first contact with the regulators.
Proponents from overseas also need to comply with the requirements of the
Australian Government’s Foreign Investment Review Board (www.firb.gov.au).
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How to progress
Interested parties can contact:
Ms Courtney Draper
Trade and Agribusiness Development Manager
Grains Industry
Department of Agriculture and Food, Western Australia
Phone: + 61 (0)8 9368 4658
Email: [email protected]
Services provided by the Department of Agriculture and Food, Western Australia to
assist investors in the agrifood sector include:
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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 (GIWA) 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: www.giwa.org.au
The Australian Association of Agriculture Consultants of Western Australia
(AAACWA) 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: www.aaacwa.com.au
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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 (WAAA).
ABN: 86 611 226 341
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