CBRE Agribusiness managing director David Goodfellow sees foreign investment in Australian agriculture coming in 30 year cycles
IN THE ebb and flow of foreign dollars into Australia’s rural industries, the investor country that inevitably draws the most attention is China.
Over recent years the large-scale investment has been winding back, but do we really understand the reasons behind these movements in Chinese investment in Australia?
In this week’s property review, agribusiness expert David Goodfellow shares his insights into why China invested in the Australian beef industry, and the reasons for its more recent decline.
Mr Goodfellow was recently appointed managing director of CBRE Agribusiness pacific region, and spoke on the topic while in Rockhampton for Beef 2021.
Investment cycles
From 2014 to early 2018, Mr Goodfellow headed up China’s Melbourne-based agricultural investor Rifa Salutory Pastoral Co, giving him some unique insights into the rationale behind some of China’s investment strategy in Australia.
Mr Goodfellow said it was important to understand how China thinks about investment opportunities. But first, he explained the wave of capital needs to be put into perspective against other cycles that have come into Australia over many years.
He said investment cycles in agriculture cycles appeared to occur about every 30 years – just longer than one generation.
“I call the current cycle ‘The Teens’, which started in 2013 when the Chinese government motived its investment community to come to Australia and start buying farms.”
But first, let us rewind 30 years to the 1980s.
During that era, Japan was a heavy investor invested in the Australian beef industry, principally complementary investments in the feedlot and processing sectors.
More importantly, Mr Goodfellow said Japan invested capital and energy into opening up the supply chain of beef from Australia into the Japanese market.
“It was a game-changer that helped underpin Australia’s ability to expand into other markets. In fact, it was only in 2019 that China pipped Japan as our most valuable export destination for beef,” he said.
When Japan slipped into recession in 1991, Mr Goodfellow said many Japanese-owned investments in Australia were sold and returned to locals. However, the trade relationship remained strong, and Australia kept exporting beef into Japan.
He said the 1980s was a buoyant decade for Australian agriculture.
“The Japanese investment was complemented by the United States investing in Australian cotton. Every state in Australia had agricultural colleges full to the brim with brilliant young minds and everyone was talking about great careers in agriculture.”
The 1950s
Rewind another 30 years to the previous cycle, during the ‘wool boom’ era.
Mr Goodfellow said the United Kingdom and Scotland invested massive capital into improving the genetic capability of Merino sheep and teaching Australian farmers how to run their farms more productively.
“The UK and Scotland helped Australia to open market access for wool into western Europe (Germany, France and Italy) and that investment saw Australia ride the sheep’s back well into the 1980s,” he said.
The 1920s
Rewind another 30 years. During the 1920s, the British monarchy provided a huge amount of financial support to the federal and state governments to acquire large tracts of land, which were then subdivided and handed to soldier settlers returning from the First World War.
Mr Goodfellow said the men were given access to five-year interest-free loans on the basis that money was used for developing that land. As a result, the country was subdivided, cleared and sown to pastures.
“There was a massive investment in the confidence of agriculture moving forward – and right now, Australia is riding another of those waves,” he said.
The Teens provided lending advantages
Mr Goodfellow said the Chinese starting investing in Australian agriculture in earnest in 2014, but the motivations were available from 2013 in the form of grants and subsidised loans from the Chinese Government.
“When Australian farmers were paying around five percent per annum to their banks or lenders, the Chinese were borrowing money at 2.5pc – and only what they needed, because some of that money was given to them for free,” he said.
With a lower cost of capital, the Chinese were able to pay a premium for land in Australia.
“On a business that is 50pc geared, the Chinese could pay about 25pc over the market (for land they really wanted) and still get the same net return as an Australian farmer,” he said.
Mr Goodfellow said China encouraged investors to source farms and to not be afraid to pay for them because they were affordable, based on their lower cost of capital.
“Once in place, the Chinese government motivated its trading community to start buying more produce from Australia. As a result, demand for beef rose, followed by grain, wool and cotton, and ultimately, wine and seafood.”
China’s motivation was to prove-up the supply chains of food from Australia because it could not produce enough food internally to sustain its population.
Confident those supply chains worked, China attempted to renegotiate the terms of its trade agreement with the United States.
When it failed to do so, the Chinese imposed tariffs on US and Canadian imports, politically encouraging its trading community to buy Australian.
The tables turned at the end of 2017 when the Chinese government stopped the grants and subsidies bound for Australia, and shifted its attention to South America.
Mr Goodfellow said that was the catalyst for China’s divestment out of Australian agriculture, primarily in beef.
“China poured capital into Brazilian and Argentinian agribusinesses and when it shored-up supply chains, had a conversation with Australia about its free trade agreement.”
When Australia refused to renegotiate the terms of the FTA, China penalised some exports, knowing they could get what they needed from South America.
Despite the actions, Mr Goodfellow refused to be critical of the Chinese who he explained were being true to their own values and culture.
“They have been traders for centuries. If you want to make money out of trading, then you need to buy low and sell high,” he said.
“The Chinese came into Australia when we really needed help, started buying land and lifting demand for our commodities. Now they are finding better opportunities elsewhere,” he said.
Mr Goodfellow said it was important to remember that every Australian has benefited from the Chinese investment in agriculture, with increased demand for commodities, prices and overall increased profitability.
“Australian producers with strong balance sheets were able to grow in scale by purchasing the property next door. Buyers could justify paying a premium due to the high commodity prices (driven in part by Chinese buying), coupled with low interest rates.”
Money out, money in
While the Chinese money was flowing out of Australia, Canada, the United States and more recently Europe started injecting money into the country.
Carbon abatement objectives
Mr Goodfellow said today’s offshore investment appetite was somewhat different.
“The Asian culture wants access to protein, so it typically invests into the livestock industry. The new investment community is not motivated by food security, so much as its interest in technology and environmental farm management.”
He said North American investors were introducing new, highly effective innovations leading to productivity increases which underpin land values.
“These approaches, adopted more recently by the horticulture and cropping industries, will also translate into livestock management. With many big superannuation funds committed to becoming carbon neutral across their portfolio by 2050, this will help to invest in a farm or two.”
Mr Goodfellow said big fund managers with a footprint in Australia had seen some good years and some tough years; what works and what doesn’t work; and they are strategically seeking opportunities.
“Investors diversify their existing portfolios by investing in worldwide agricultural assets to spread climatic risk and promote trade relationships. It also protects them from volatility in the share market, commercial property and bonds.”
Final thoughts
While Australian land prices appear to be skyrocketing, Mr Goodfellow said they are still lower than elsewhere in the world.
“Our agricultural land prices are coming off a really low base, and now Australia is catching up to the rest of the world.”
He is confident the investment cycle in Australian agriculture has not yet peaked.
“The appetite for further investment should continue, with plenty of overseas capital seeking placement. Despite Chinese divestment in the beef industry, I believe the best times are still to come.”
Mr Goodfellow described 2021 as ‘exciting times’, but warned Australian agriculture to wisely invest this new wave of capital to enable it to survive the next 30 years.
Related reading:
https://www.beefcentral.com/property/boom-and-bust-is-china-bowing-out-of-australian-agriculture/
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