In this re-release of our most downloaded episode, Praemium's Damian Cilmi speaks with Steve Jarrott, portfolio manager with Warakirri Asset Management, about agriculture as an asset class and the unique position of Australian agriculture against the backdrop of rising inflation, shifting global economies, and climate change. Steve speaks about the development of an agriculture REIT and agriculture investment as a key component of a diversified portfolio.
Praemium Limited is the issuer of the Investment Leaders and Advice Leaders podcasts. These podcasts are for information purposes only and aren't tailored to individual financial situations and do not contain financial advice. Views expressed by presenters may not align with Praemium's and nothing in this podcast should be seen as an endorsement or recommendation of the product or strategy. For more information about Praemium, including our disclosure documents, please visit our website.
We recommend that individuals seek professional financial advice before taking action.
In this re-release of our most downloaded episode, Praemium's Damian Cilmi speaks with Steve Jarrott, portfolio manager with Warakirri Asset Management, about agriculture as an asset class and the unique position of Australian agriculture against the backdrop of rising inflation, shifting global economies, and climate change. Steve speaks about the development of an agriculture REIT and agriculture investment as a key component of a diversified portfolio.
Praemium Limited is the issuer of the Investment Leaders and Advice Leaders podcasts. These podcasts are for information purposes only and aren't tailored to individual financial situations and do not contain financial advice. Views expressed by presenters may not align with Praemium's and nothing in this podcast should be seen as an endorsement or recommendation of the product or strategy. For more information about Praemium, including our disclosure documents, please visit our website.
We recommend that individuals seek professional financial advice before taking action.
Welcome listeners to the Premium Investment Leaders Series podcast. I'm Damien Chilney, head of Investment Managers and Governors at Premium. Today we're joined by Steve Jarrett, portfolio Manager of the Diversified Agricultural Fund at Warakiri. Prior to Warakiri, steve spent a decade with Wes Chester, the Agricultural Investment Arm of TIAA, a new event group, the world's largest farmland investment manager. Not only is Steve well credentialed in this space, he takes a personal active interest for his family Farming, new South Wales. Hopefully we can talk about that as well, and about Warakiri. They've been operating agricultural assets for over 25 years with more than 200,000 hectares of land for investors, and they manage over 2.3 billion in farmland commitments. Welcome to the show, steve.
Steve Jarrott:Thanks a lot, damien, good to be with you.
Damian Cilmi:Thank you. Pretty excited today to do this podcast, steve. This is there's a lot of interesting content on here. Agricultural is it's a big topic. We're going to talk a lot about inflation as well and how the asset class works in this kind of environment, and hopefully we get to talk about some of my favorite topics in wine and food. So let's see how we go. So let's start out just a bit of a backdrop about investor interest in agricultural assets. Over the last couple of years it's really big again. I think COVID showed up a lot of this stuff. People were quite interested about food supply and security. I think that was probably a little bit of a trend, anyway, almost from pre COVID point of view. And then I think, as the world goes on as well, a little bit more polarized, that this becomes a really interesting topic. So just tell me about the backdrop of what's been going on with Ag. Yeah, definitely, damien.
Steve Jarrott:And look from our perspective. I think it's probably been something like 15 years of development and evolution of agriculture as an asset class. But yeah, certainly over the last two to three years we've seen a broadening of appeal and a new motivation for investors to get exposure to the asset class. The attractive thematic around agriculture that's something that we've been talking about for a while in terms of global food demand or growing population and the resulting global food demand demand for fiber on the back of that as well, but then more specific situations like the rising middle class in Asia and the flow and effects to higher value products like proteins and to wine and to fresh fruit and veg. So, as well as that, we're also in Australia really well placed to meet that demand.
Steve Jarrott:So we've got world leading farming capabilities. We've got good proximity to our export markets and good trade channels and a reputation for a good, clean, high quality product as well. So you've got all those sort of strong fundamentals that we see really valuable support for a long term investment through any cycle. But, as you say, in more recent times we've seen agriculture, we think, getting the credit it deserves for a low correlation to traditional investments as an insulator to volatility in a diversified portfolio. And, yeah, through this COVID environment, we've seen that almost as a safe haven investment has highlighted its resilience, has been highlighted. Through that period We've seen still good growth rates and good income returns while the markets have been challenged. So there's all that and now more than ever, as a hedge for inflation as well, as you say.
Damian Cilmi:So we've seen I think from an investor point of view I mean we can characterize it as do-day preppers as well too like everyone's got really interested about food, but then you've got institutions as well that have been really piling into this place as well. So have you seen that kind of uptake and interest in institutional investors?
Steve Jarrott:Yeah, I think that's been that development we've talked about over the last 10 to 15 years. You sort of had some early movers in that space and that momentum's gradually built up. Now we're seeing agriculture and the whole natural capital becoming to play as well and the opportunities that come through that.
Damian Cilmi:Yeah, no, no. That's really interesting. And let's talk about inflation as well. It seems to be everything that we talk about at the moment and we've obviously got a rising in inflationary environment which we haven't seen largely for the better part of 20 years. And it's a different regime as well. It's higher inflation, potentially higher interest rates. Everyone's kind of scratching their heads, pulling out the old playbooks about what kind of assets work in those type of regimes and environments. How does Ag stand up?
Steve Jarrott:Yeah, look over history, we see that agricultural returns, agricultural investments, they behave differently, typically, to traditional asset classes. So and that's across a range of conditions so a well-managed agricultural exposure is naturally giving you that defensive characteristic to your portfolio, as well as the competitive risk adjusted returns. But specifically in an inflationary environment, there are some natural challenges that the industry has to deal with. So there is, like others, rising input prices, there's labor cost challenges, but on a net basis, there's a clear benefit, or agriculture is a clear beneficiary to these economic conditions. So why is this the case?
Steve Jarrott:You've got inelastic demand for the product, so food, the necessity to eat, is obviously a core reason there. Inelastic supply of assets land, farmland and water is finite and can't be easily substituted, and so that's a key factor as well. And agricultural products are closely correlated to food prices, essentially. So as the inflation flows through into food pricing, so too does the value of the agricultural products at the farm gate. So when we look at the data and we see this impact flowing on to valuations of the assets, we see that in periods of high inflation, the value of farmland increases at its highest rates as well Over the last 30 years, particularly where we've seen CPI above 4%. That's where we've seen the highest rate of farmland value growth over time.
Steve Jarrott:So the key then is to design or choose an investment product that maximizes these inherent strengths in these kind of environments. So yeah, our diversified agriculture reap fund structure allows us to take exposure to the core agricultural property and open ourselves up to that value upside. Our tenants are strong agricultural operators, best in their field, vertically integrated in most situations, so they're taking advantage of that product value. And all of our property leases then have annual reviews to CPI and generally a periodic reset to market valuation of the asset as well. So all factors that are helping this investment be a good hedge for inflation.
Damian Cilmi:So let's delve a little bit more into valuations as well, and I can't help thinking I'm curious to know about. Inflation has started. It has been running for 12 months or so a little bit longer, some would argue. Does the valuations get reflected quite immediately, or are they a bit lagged? So what's happening in the valuation space there? Has it got more to run here?
Steve Jarrott:Yeah, generally there is a bit of a lag and we do think that there's more to run.
Steve Jarrott:We've definitely seen investment returns from agriculture as a whole have been strong, so we've touched on that.
Steve Jarrott:This has come from some good seasons in key products, some particularly strong commodity prices as a result of global market factors, and this profitability that's flowing through, combined with a good outlook going forward and low interest rates, has really fueled investment confidence in the industry more broadly. So this is, then, driving value growth, as particularly private businesses, family farms, those looking to grow and consolidate on the back of this optimism, are competing for assets. So in 2021, for example, the median price of agricultural land in Australia rose by 18%. In particular, we've seen strong demand and local competition for assets in traditional sectors, so you brought acre properties, production of crops like wheat, barley and canola, grazing, assets for key proteins so beef and lamb and fibres like cotton and wool have all been the areas where we've seen the most growth. So, yeah, it's our view that there's still some upside to come and there's a bit of lag in value in these sectors, particularly over the long term. But equally, not all sectors have seen this kind of headline.
Damian Cilmi:That's what I was going to ask you was a really broad based, or is it? You know this pocket.
Steve Jarrott:No, there's still elements of, particularly in the high value sectors that we see. So in sectors where you have a more specialized investment or a more specialized property, more capital intensive investments in particular, and specific markets that are influenced by different factors. So the less commodity products, the products that are the more fresh food value added products, have all got their own separate market factors driving value there. So we haven't seen those across the board uplifts across the likes of viticulture and horticulture that we've seen more in broad acre agriculture and there's still value opportunities within these cycles that we see. So wine grapes, for example. To come to the wine, it's a record vintage and a lot of volume in produced in the industry. Last year has then coincided with some market challenges, in particularly with the Chinese market and tariffs on wine products.
Damian Cilmi:So my dream to buy the winery. It's still intact, is it?
Steve Jarrott:That's right. There's still an opportunity there at the moment. Look, we haven't seen the values across the sector correct in a dramatic way at all, but there is the opportunity there that there probably wasn't before, when balance sheets were strong and confidence was really strong in that industry. We're seeing opportunities there to acquire assets and value and think that that's a good long term sector as a result of that.
Steve Jarrott:Avocados are another example where we've seen really strong production on the back of some good seasons, high prices and a lot of new plantings in that sector flows through now to a few years down the track where we've got surplus supply and that's driven lower prices. So that's another example of that cyclical nature where we do see from sector to sector that there's still value opportunities and, yeah, now that there's examples of that right across the sector, I suppose, like across the industry, agriculture is really broad ultimately and our agriculture re-products as a result of that, specifically look across a diversified range of sectors and looking through the value cycles at robust long term investments. That is all part of our strategy to just patiently build an exposure to agriculture over time.
Damian Cilmi:I suppose there's no different than building a traditional portfolio where you want some diversification in there because you don't have perfect foresight of the future. So, just a slightly different tact on this valuation play. You know some of those differing advancements or you know rises in some of those property prices and others not. So Is there a bit of an arbitrage there where people can buy some maybe softer price assets and repurpose them into a higher value.
Steve Jarrott:Yeah, look, generally the market's pretty well balanced in that regard Is it efficient? Yeah, it's a relatively efficient market. There are a few operators out there or investors in the space looking at change of use and higher value prospects, but there's some risk in that as well so it's balancing up that sort of proven path, strong sort of robust returns with low volatility, or maybe looking for the alpha and doing something different and developing new assets, or that going down that change of use, higher value path.
Damian Cilmi:Yeah, let's slightly change tack. Here we're talking about climate change and environmental impacts. I did see somewhere that I think that agriculture accounts for like 30% of emissions, and I think even in New Zealand it's bigger than that as well too. So it is a big topic, you know, for this asset class, I imagine that energy as well is a big factor of getting your goods to market and so forth, so I can imagine running a farm. All these kind of considerations are highly important, and then climatic changes as well. So you know you bind these assets for the real long term. You've got to have a view on this, I'm assuming. Okay, how does this factor into your assessment when you're looking at sites?
Steve Jarrott:Yeah, I think. Firstly, the opportunity to contribute to an improvement in that situation and to offset emissions, whether that be by changing management practices, storing carbon in the soil, better production systems that enhance that, tree plantings, vegetation plantings, putting areas aside they're all things that we look at across the business and opportunity across our different agricultural platforms. But the climate change is obviously a key consideration in any sector when you're looking at the fact that your product is the inputs to that product largely climatic. So ultimately, we're not only support the science behind climate change but we embrace it in our investment process, as you say there. So, while there's many sort of predictions that suggest that it's going to add risk to the program, it's not all bad by any means either. So, like any investment risk, we just think it's a case of having the knowledge and expertise to identify and assess and make decisions that mitigate those risks.
Steve Jarrott:So for each investment, we map out future climate scenarios for a range of emissions scenarios.
Steve Jarrott:At each location we analyse the exposure and consider the sensitivity, the adaptation ability of the property and the operation and the vulnerability of the asset and its operator to those climate scenarios. So ultimately, this work informs us as to whether a property is fit for purpose, whether it's a sustainable investment grade asset that's going to be a good long-term investment. So, for example, where we see rising temperature or future rainfall risks coming through in those emissions scenarios, we then look at how could this impact the production on that particular asset and whether we can invest in high reliability water supplies for irrigation to mitigate that water use efficiency, infrastructure, different crop types potentially, or technology to manage such a scenario. On the flip side, though, we might also see that the same emissions scenario is telling us higher temperatures or reduced frost risk is likely over time, and so that might be a positive factor. So, with frost risk in particular being a key consideration for most crops, and even less rain at certain times of the production cycle around harvest, for fruits, for example, over summer.
Damian Cilmi:Rain not so great yeah not so great.
Steve Jarrott:So where we see that that potentially presents an opportunity that balances that risk. So we try to do all the background work to understand that with the science. And there's certain locations where there's a relatively neutral or stable general impact of climate change predicted as well, like Tasmania, for example.
Damian Cilmi:Yeah, because we're outside of this. We were talking about Champagne and how that region, it's potentially looking a little bit warmer and that they might need to travel further north to get the optimal zone. If you will, you own a site down in Tasia, a vineyard. What are some of your what's some of your modeling, some of your scenarios about that site you've got down there?
Steve Jarrott:Yeah, definitely in that case. As part of the business case for that investment, we looked at that as a factor. That site is largely focused on producing sparkling wine. Tasmania is a leading grow of a sparkling wine in Australia and really producing a product now that's competitive on the world stage.
Steve Jarrott:So when we look at that with the overlay of potentially a threat to the most famous of all sparkling wines or Champagne production, then we see an opportunity there for that asset over time. But probably more importantly, we just saw the fundamentals of that investment as being relatively stable from a climate perspective, as well as all those other factors of fundamentals of supply and demand for the assets Brand Tasmania, the key varieties that are grown. There are all factors that we've considered in making that investment.
Damian Cilmi:Yeah, and again, I suppose, like a assessment of different outcomes, they could just move into some other different grapes if that's an area played out.
Steve Jarrott:Yeah, that's right. So, understanding how flexible the assets is, their quality, land well suited to viticultural production, reliable water resources, and where is it positioned in terms of future varieties? So moving to say, from the focus of sparkling wine and pinot to other varieties, probably not so Tasmania, but definitely in other regions of Australia.
Damian Cilmi:Do they play around? You know they try out different things to see what's working.
Steve Jarrott:Yeah, that's right, and something like moving from a French variety to a more Spanish or Italian variety of wine grapes that will generally have better resistance in heat and drought conditions and produce a stable quality of product, then might be a change and an adaptation to climate change that we see across wine growing regions over time.
Damian Cilmi:Yeah, no, no, fascinating. It's good to hear that my supply of the favorite stuff will be in check, so that's good to hear. So let's talk about accessing this asset class. You know it's been a very private market, either for the wealthy or those who were operating family farms. You know an all-in kind of investment Institutions have kind of had a chance to get in as well with their particular balance sheets. Tell us now about, I suppose, how you've been trying to structure your program, and especially with your diversified program and you've gone down. You know a buy and lease approach, you know. So just talk us through how you put this all together for investors.
Steve Jarrott:Yeah, sure, damian. So Warwick-Hurray have been successfully managing agricultural investments for almost 30 years now, but in this part of the business we've historically been working with large institutions and we've managed specific mandates focused usually on a particular ag sector. So as a business, though, we're a multi-boutique, so we have a range of different product offerings across small caps, emerging markets, us property, currency, et cetera. So we've had this ongoing conversation with clients of those products and other clients of the business. How do they get exposure to agriculture when they look at what we're doing in agricultural platforms? So how do they do that without the kind of sort of 500 million to a billion dollar commitment that we see is required to achieve the scale and the diversification that a successful direct and owned and operate investment will deliver?
Steve Jarrott:So when we fleshed this out and we looked at the interest as well to gain access to a broad range of sectors in one particular investment, looked at the investment demand and yield opportunity in those higher value sectors that we've talked about of agriculture, and also the opportunity to partner with other existing best in class operators as tenants of these properties in these different sectors, we came up with the product that a pooled fund that acquires agricultural properties in a REIT-style structure, specifically to lease them to these high quality operators, became a natural choice. So yeah, so that structure allows us, then, to offer this product to a wide range of wholesale clients in the advisor network. High net worth, family offers and the small super fund space.
Damian Cilmi:I just can't help thinking you couldn't have built this product at the start of your journey. It's kind of like that natural progression after you've had the years and years of managing individual sites and then the ability to roll it all in together. So you know it's got a very diversified exposure through there, through a lot of different sectors, which is impressive. But the volatility part that you talked about because particularly with the model that you've come with, there's not as much, there's no real operational risk out of it. You know you're not owning the, the farm per se, you're owning the property leased out to these farmers. So that does bring, I imagine, a lower risk profile in a sense through that there. What's the difference, I suppose, in risk and return into a full integrated owner-operator model versus what you put together here?
Steve Jarrott:Yeah, it's a good question, David. For us it comes down to that balance between risk and return, but also income and growth and the volatility of those over time. So when we look at it, we look at in its most simplest form, like you talked about before, a family farm investment or a single investment in a certain agricultural asset that's going to give you, at one location, one sort of exposure to climate maybe exposure to a couple of different products in terms of what you produce and grow, and it's really concentrating that risk to one side.
Steve Jarrott:So when we build a portfolio, an owner-operate portfolio, to achieve the risk return balance we think is critical there and is going to attract investment interest.
Steve Jarrott:It's a case of building that to scale, diversifying it, getting the economies of scale in our operations, sophisticated management structures, product marketing structures and the like. So that's a big-ticket, large-scale investment usually better suited to a large-interest institutional commitment. So when we're looking at the opportunity to try and achieve a similar risk return profile, even dial down the volatility, deliver something that's really regular and also still have some growth potential there for investors across wholesale markets, on-it-worth family office the REIT-style structure gives them that exposure to the agricultural asset class and through investing with tenant partners who are the best at what they do, we also see we can give that broad sector diversification without compromising any of the performance of the assets or the underlying income returns. So that means that assessing the tenant counterparties and using our expertise and history and agriculture to focus on are they good operators, best practice in their field, as well as good credit. Risk obviously is where we see managing that risk is most important, as opposed to the OECD investments where the risk is in commodity pricing year or as in climate.
Damian Cilmi:And just a couple of quick fire. How many agricultural products you know underline agricultural products do you hold in the diversified product?
Steve Jarrott:That's a good question. I think we're six different sectors at the moment, six different products and, yeah, the diversification has now got us in five different states. So in turn, we're five different states?
Damian Cilmi:Yeah, yeah, yeah, yeah, it's my other question.
Steve Jarrott:I have many sites, so five different states, which is then giving us that five different climate zones, water source diversification, and so ultimately we've set the foundations there to build that out over time. We'll be in more geographic areas, we'll be accessing more end markets. There's a good balance there between export markets and domestic consumption, between fresh product and value added products like wine. So that's our goal ultimately to give our you know, hold us a really broad spread of explosion of the agricultural investment space.
Damian Cilmi:Well, that's good. There's so much to talk about Now. I think that was a great introduction to this sector here, and there's so much more. Like we could talk about water rights. You know, we can talk about crop development as well, and I still think there's far more to play out on this inflation and interest in this asset class here. So I'd love to have you back again to continue to explore this. Steve, that was fantastic. Thanks for joining us today.
Steve Jarrott:No, thanks, david. Thanks for having me.