Macquarie is one of a small group of banks whose exposure to agriculture extends beyond providing commodity derivatives products or investment banking services and on to the farm itself. Its Agricultural Funds Management business owns and operates 3.2 million hectares of farmland across dairy, sheep, cattle, horticulture, forestry and wine estates, mainly in Australia, and oversees more than $1 billion in investments.
Another bank active in the sector is Renaissance Capital, which, through a venture called Ukrainian Agrarian Investments (UAI), operates 235,000 hectares of land in the east European country.
Farming, though, is one of the toughest industries. There are numerous challenges in feeding a growing population while overcoming supply-side issues such as increasing scarcity of arable land and water, logistics, and competition from biofuels among other things. For example, water usage in agriculture needs to increase by 50% over the next five to 10 years just to keep up with demand but over the next 15 years two-thirds of the world’s population will be under water stress, says Tim Hornibrook, a director within Macquarie’s agricultural business.
But the rewards from farming can be good too.
According to the Financial Times, a recent research study by Savills, the property group, found that agricultural funds, which own land, are forecasting cash-on-cash returns of 3% to 8% and internal rates of return of 10% to 18% after fees, while some funds expect to generate up to 25%.