Five reasons to invest in agriculture right now

The outlook for Australian agriculture is positive following recent record-breaking grain and cattle prices. Here we outline five reasons why now is a good time to invest in the sector.

Natural hedge against inflation

Inflation is rising much faster than expected – both locally and around in the world. In Australia, the consumer price index jumped 1.8 per cent in the June quarter, with the annual rate at 6.1 per cent – the highest for 21 years. Traditional hedges against inflation, such as government bonds, are offering low yields, so alternatives such as agriculture are an attractive option.

And while agriculture may be a hedge against inflation, it can also benefit from it as higher inflation leads to increases to food prices, which in turn delivers greater returns to investors over the long term. While returns do vary over time, the value of agriculture assets tend to increase during high inflation.

Low correlation and good diversification

Agriculture investments are considered alternative assets that offer a low correlation to other assets such as equities, property and bonds. Any market volatility that affects the more traditional asset classes – such as the volatility we are seeing now – doesn’t have the same impact on agriculture, rather it continues to deliver steady returns, generally derived from the rental income investors earn from leasing land to farmers.

Agriculture investments also offer diversification benefits. When economic shocks such as the COVID-19 pandemic occur, agriculture remains largely unaffected, providing surety and peace of mind to investors.

Strong predicted demand for food

The demand for Australia’s agricultural products is rising, especially within Asia – where there is increasing demand for protein driven by rising incomes and a population growth that is one of the fastest in the world. In fact, the world’s population is predicted to reach 9.7 billion by 2050 – and these people need to be fed.

Australia’s food exports are recognised for their high quality and the rising demand for them is creating opportunities within the sector, which is well set up with the free trade agreements it has with several countries.

The Department of Agriculture, Fisheries and Forestry forecasts the value of agricultural production for 2022-23 to be $80.4 billion, the second-highest on record, and the value of agricultural exports to be the highest on record at $64.9 billion. These figures reflect the current favourable Australian conditions and very high world food prices, which are currently affected by the poor world production outlook, war and trade restrictions.

Good source of passive income

The returns investors receive from agriculture investments largely comprise regular income received as rent paid by those who are farming the land. Agriculture assets such as farmland also have fewer issues than, say, other property investments in that there is no turnover of tenants.

While these assets offer good income returns, a secondary benefit is the capital gain when a farm is sold. With the demand for food growing around the world, and farmland being a finite resource, over the long term, the capital gain should be very attractive.

A conservative but stable investment

While agriculture is not without its risks, such as from the effects of climate change, this asset class is considered a conservative investment that offers stable returns over the long term. While such returns may not reach the heights of some other assets at certain times in the economic cycle, the risks are lower and hence provide an effective diversifier for portfolios.