THE TEN RULES FOR INVESTING IN

AGRICULTURE
For anyone considering an investment in agriculture, there are some critical
considerations to be taken into account. Based on over 15 years of
management experience and building a portfolio of over $400 million
invested in Australian agriculture, Growth Farms Australia has put together
what we believe are the ten key rules that investors need to focus on for
success.
Rule 1. Only invest in countries that have strong rule of law. Most
agricultural investments require a long-term view and there are plenty of
risks around what might happen over a ten or twenty year period. A typical
investment in mainstream agriculture will require 70-80% of your
investment to go into land. There is no need to add to these risks by going
into countries where you put your capital at risk. Generally, the higher
yields that come with investing in countries where the rule of law is
substandard are not high enough to justify the risks
Rule 2. Countries with low, preferably nil, subsidies to the agricultural
sector are preferred. Subsidies can be alluring because they can be seen
as underwriting performance but they have serious long-term impacts.
These include a loss of focus on remaining globally competitive because
the imperative to do so is either removed or reduced by the subsidies.
Secondly, there is substantial medium to long-term risk that the nature and
quantity of the subsidy will change over time. The likelihood of this
increases as government budgets come under increasing pressure. If the
sector does not have any subsidies they cannot be removed.
Rule 3. Invest in countries with low land cost per unit of
production. As an example, in many of the EU countries (including the
UK), land for wheat production costs in excess of US$2,500/ton of yield. In
some in Eastern European countries and Australia the land cost is around
half per ton of wheat produced compared to the EU.
Rule 4. The production system must be low cost per unit. The majority
of agricultural products can still be considered commodities it is difficult to
differentiate to receive a premium and then to maintain the advantage that
this may offer. For all commodity producers, the key to being profitable over

the long term is to invest in countries that have sustainable low cost of
production per unit. It is important that the land is cheap per unit (Rule 3)
but also the system of production used on the land is efficient so production
cost per unit is low.
Rule 5. Invest in countries that have exportable surpluses. This means
they produce at a competitive price and/or at high quality. Both are
essential to underpin demand over the long-term.
Rule 6. Favour sectors that have a diversity of markets. This reduces
market risk compared to sectors that have one dominant purchaser, be
they domestic or international.
Rule 7. Understand volatility and how it can be managed. Greater
volatility will usually mean greater risk. Some countries tend to more
volatile agricultural sectors than others, either because of production
volatility or price volatility. If there is substantial volatility, are there means
available to manage it? Examples might include diversity of regions or
commodities to reduce portfolio volatility.
Rule 8. Land use flexibility is good. Agriculture is a sector that favors
longer term investments. This brings uncertainty around production
systems and around demand. Investing in land which has scope for a
number of different land uses helps reduce this risk over the long term.
Rule 9. Look for sectors that can deliver productivity gains. Without
productivity gains it becomes hard to remain competitive against other
sectors. Productivity improvements are critical to help drive land
appreciation
Rule 10. Consider all the risks. These may relate to climate change or
ESG issues, or some other factor. While risks are not easy to predict, they
need to be considered and put into perspective given all the other attributes
of the investment. Some risks are such that it may prevent an investment,
others may well be quite manageable.