miller & james rural property...

Miller & James Rural Property Management

Investment overview

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Investment Strategy

The company still occupies the same offices in Temora, a regional

centre in the agriculture heartland of NSW where it all began.

Also unchanged is the commitment to deliver outstanding

service to all clients. Over the years, the business has evolved

from offering a variety of goods and services to its rural clientele,

to now concentrating solely on providing real estate and property

management services across Australia.

Since 2009 Miller & James has been offering services to

international investors. Miller & James offer a complete package

for absentee landlords - from the purchase of the property, the

identification of potential tenants, and the management of their

farm investments.

Miller & James has two Directors, Angus McLaren and Bruce

Holden. There are 10 full time staff employed in the business.

All members of the rural team have extensive farming knowledge

either being raised on farms or still managing their own farms.

The integrity of Miller & James has attracted many loyal clients.

The company is widely regarded as the premier rural real estate

agency in Southern NSW.

Daniel Köppel works for Miller and James as a European based

investment advisor servicing their growing overseas client base.

He spends approximately two months every year in Australia

visiting farms and meeting tenants operating the portfolio of

farms managed by Miller & James. His travels around Australia,

which have been more extensive than most locals, has increased

his knowledge and ability to identify investment opportunities in

the agricultural sector in Australia.

About us

⊲ Undervalued Farmland (Australia)

⊲ Bottom of the Cycle

⊲ Increasing Global Demand for Product

⊲ Inflationary Hedge & Low Correlation

⊲ Capital Growth Potential

⊲ Diverse Range of Commodities

⊲ Annual Operational Yields

Miller & James Temora was established in 1903 as a Stock and Station Agency. The company, led by dedicated partners, took a conservative approach to business focusing on long- term client relationships and delivering superior services.

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Investment Strategy

Assets under management

$115 MILLION OF RURAL PROPERT Y UNDER MANAGEMENT

54 FARMS UNDER MANAGEMENT

160,000 ACRES UNDER MANAGEMENT

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Investment Strategy

We provide capital growth over the long

term and aim to benefit over the long term from the forecast

appreciation in grain prices from their

historical record lows

We generate an income stream for investors

from the yield provided by the rental income

We provide an investment vehicle for

individuals or small groups given them

direct exposure to a diverse commodity

production portfolio

Active in 3 states

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Investment Strategy

Our farms

FARMS UNDER MANAGEMENT

Below is a map of Australia showing our farms under management

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Investment Strategy

Based on global farmland index information, published by Savills (2018), the cost of Australian farmland per hectare is the lowest in the

world. The average farmland value in Australia is US$2,117 per hectare. Australian average farmland values are 79% cheaper than the

United States representing a strong value opportunity compared to its peers. There are of course a range of reasons for differences in

pricing, from subsidies, tariffs and other barriers, as well as productivity, soils and climate.

$60,000.00

$50,000.00

$40,000.00

$30,000.00

$20,000.00

$10,000.00

$0.00

Australia

Brazil

Uruguay

HungaryCanada

RomaniaFra

nce

Argentina

United StatesPola

nd

Denmark

New Ze

alandIre

land

Germany

United Kingdom

2002 2008 2016

Our farms produce the following commodities

WHEAT CANOLA BARLEY PULSESCOTTON

BEEFWOOLLAMB MUTTONHAY

Source: Savills, 2018, Global Farmland Index

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Investment Strategy

However, if the driver for your investment is purely

to capture the best return, the correct farmland

investment strategy is buying and leasing.

The average return (EBIT earnings before interest

and tax) across the Australian farming industry is

about 6.5%. The top quartile reaches 10.5%, whilst the

lowest quartile is only 2.5%.

If a foreign investor wants to start their own farming

operation, they usually employ a farm management

company. The farm management company hires

workers and contractors, who do the actual work.

All these additional layers of costs make it nearly

impossible to beat or even reach the average of

6.5%. On top of this, there is much more work and

due diligence involved from the side of the investor.

Additionally, they have to stomach the yearly volatility

of the returns which comes hand in hand with farming

in Australia.

The much simpler approach is to buy a farm and lease

it to a successful neighbour for a yearly lease in the

range of 4.5% to 5.2%.

Over the years we have trialled various farming

models. This includes share-farming agreements,

(where we received 25% of the harvest proceeds)

and employing farm management companies to run

the farms on the investors behalf.

Farmland investment strategies

We now have 10 years of data and the conclusion

we have come to is that if you want to maximise

your returns, the right strategy is to purchase and

lease farmland.

Farmland pricing is quite efficient within a region,

but there can be large price differences over larger

distances.

Currently farmland in Western Australia is valued

roughly only half the price of land in NSW. This is

based on the dollar amount you have to spend to

purchase the area of land, which produces one ton

of wheat.

The wheat belt of NSW had a few profitable years.

Farmers rebuilt their equity. Once financial freedom

increases the natural tendency of farming families is

to purchase more land.

Western Australia is influenced by different weather

patterns. After some average years they have had

one of their best years in 2018. We expect cashed up

farmers will bid up prices for farmland in WA over the

coming years.

Australia is the same size as the USA. Different

regions across Australia experience different cycles.

The astute investor will always be able to find and

capture undervalued farmland somewhere.

When a wealthy person thinks about investing in farmland, they usually picture operating a farm and all the excitement and disappointment that goes with that investment. Producing your own crops or raising cattle has a certain primal appeal which is why rich people often buy vineyards or small cattle breeding operations. If the driver behind such an investment decision is an emotional one, we fully understand it.

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Investment Strategy

The much simpler approach is to buy a farm and lease it to a successful neighbour for a yearly lease in the range of 4.5% to 5.2%

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Investment Strategy

In the first instance, Miller & James identify suitable

farms, which meet certain investment criteria and risk

parameters. After a ‘ground truthing’ due diligence

process, the findings are reported back to the

investor. The next step is to set up an entity to hold

the asset. Miller & James have close relationships

with several law firms, all of whom specialize in rural

transactions and foreign investment. Also, at this

stage, an accountant needs to be appointed. The

solicitor and the accountant work closely together to

ensure the optimum investment vehicle is created for

the farm investment.

On most occasions, prior to the purchase of the

property, Miller & James have already identified a

tenant who is interested in a long-term lease of the

farm. Miller & James have access to a large pool of

quality farmers who are interested in increasing their

operations through leasing additional farmland. It is

important to take special care in selecting the right

tenants. A good tenant is important to ensure your

farm will improve in quality, fertility and appearance

and ultimately, also in value.

Once the property is purchased, the next stage is

the management of the lease for the investor. Miller

& James ensures the lease payments are made on

time and takes care of the invoicing, collection of GST,

and CAPEX issues. If a tenant believes funds need to

be spent on improving infrastructure, Miller & James

will conduct an on site visit, collect quotes, and then

advise the investor on the best way to proceed.

Our services

Miller & James also provide annual reports on the

cropping program and other relevant facts to the

investor. This might include a summary of commodity

price trends or a detailed analysis of the weather.

At the end of the lease term, Miller & James will either

renegotiate an appropriate new lease price with the

existing tenant or find a new tenant.

Leases can be structured in many ways. Miller &

James usually recommend five year leases, but they

can be for shorter or longer periods. The lease price

is often linked to CPI (consumer price index) and will

increase on a yearly basis. The lease yield depends

on many factors such as, the region where the farm

is situated, whether it is a cropping farm or a mixed

farm, whether there is expensive infrastructure on the

property etc. Lease yields currently range from 4% to

5.3% based on the purchase price. Lease yields have

reduced slightly over the last few years, mirroring

falling interest rates across the globe.

Miller & James currently manage over $100 million

worth of farming assets across Australia on behalf

of local and overseas based investors. The farms

are in NSW, QLD and Western Australia. The

purchased farms include cropping, sheep farms

and cattle stations.

Miller & James offer complete property management solutions to investors who see rural property as an attractive asset class.

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Investment Strategy

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Investment Strategy

Growing consumption

Global grain consumption has consistently risen

over the past 50 years and is expected to continue,

driven by population growth and rising per capita

incomes in emerging economies. Grain consumption

is forecast to increase by 13% over its current level to

reach 3.49 billion tonnes consumed by 20271.

Bottom of the cycle

The inflation adjusted price of wheat per tonne ($US)

is currently among the lowest it has ever been on

record (since 1866), reflecting high supply. However,

according to independent reports from sources

such as The World Bank, soft commodity prices are

now in the early stages of a new cycle – the upward

leg. Driven by the structural imbalance in the global

markets, The World Bank predicts a 23% increase

in nominal wheat prices over the next 8 years2.

This cyclical turnaround in prices over the long-

term suggests an opportune time for investment in

agriculture, including grains.

Global grain industry

Global demand for grains is expected to increase over the next five years. By 2027, global grain consumption is forecast to increase by 13% over its current level, to reach 3.49 billion tonnes consumed3.

Sources:

1 Food and Agriculture Organization of the United Nations, 2018, Agricultural outlook 2018-2027

2 World Bank, 2018, Commodities price forecast April 2018

3 Food and Agriculture Organization of the United Nations, 2018, Agricultural outlook 2018-2027

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Investment Strategy

This growth in demand is likely to continue to be driven by population growth, and a substitution of wheat for traditional grains in emerging regions such as Asia and Africa. It is our belief that this growth will result in over 150 million new mouths to feed every year. Based on this forecast, it is expected demand will outstrip supply. Australia with its strong export market and close proximity to Asia is extremely well positioned to capitalise on this trend.

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United States 15.7%

Russia 14.8%

Canada 13.0%

Australia 11.9%

France 7.7%

Ukraine 7.1%

Argentina 6.1%

Germany 4.1%

Romania 2.9%

Bulgaria 2.0%

Other 14.7%

Worlds Wheat Exports By Region (value)

Inflation Adjusted Price (US $/t)

Current Level (as of 30 Sep 2018)

Minimum Maximum

Wheat $173.43 $133.80(1999/2000)

$1,432.51(1917/1918)

Sorghum $127.95 $90.64(1999/2000)

$790.80 (1947/1948)

Barley $205.31 $136.48(1998/1999)

$1,070.87(1917/1918)

Corn/ Maize $133.85 $98.62(2005/2006)

$1,045.78 (1917/1918)

Source: USDA, 2018

In 2017, wheat prices increased 36% following a reduced crop outlook in the major grain trading regions6. Wheat prices are forecast to increase 17.1% to reach USc603.4/bushel by 20207. Driven by the structural imbalance in the global markets, the World Bank predicts a 23% increase in wheat prices over the next 8 years. This cyclical turnaround in prices over the long term suggests an opportune time for investment in agriculture, including grains.

Sources:

6 Bloomberg, 2017

7 CME Group, 2018

Supply and Demand Trends for the Global Grain Industry

Global Grain Industry

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Grain prices are typically driven by international supply; the greater the supply of grains, the lower the price. Following favourable growing conditions in 2016/17, global grain production reached 2.6 billion tonnes, exceeding the previous record high by 139 million tonnes set in 2015/164. These high levels of world grain supply and high volumes of opening stocks placing downward pressure on prices5: The world wheat indicator price fell from US$348 a tonne in 2012/13 to US$194 a tonne in 2016/17.

The world coarse grains indicator price was an average of 48% lower in 2016/17 compared to 2012/13 at US$154 a tonne.

The world price for barley was an average of 44% lower in 2016/17 compared to 2012/13 at US$142 a tonne. However, according to independent reports, from sources such as the World Bank, global grain prices are now in the early stages of a new cycle – the upward leg.

The grain industry is categorized by four types of products: wheat, coarse grains (which includes barley, sorghum, corn, oats and triticale), legumes and oilseeds. As at September 2018, the top three producers of grain were the United States (568.4 million metric tonnes), China (559.6 million metric tonnes) and India (292.5 million metric tonnes)1. Approximately 15% of annual global grain production is traded on the global market2. Of this trade, wheat is the most important. In 2017, global wheat exports were valued at approximately US$39 billion3. As shown in the graph, Australia is the 4th largest exporter of wheat, after Canada, the US and Russia.

Pricing Trends for the Global Grain Industry

$1,600

$1,400

$1,200

$1,000

$800

$600

$400

$200

-

1913/14

Source: USDA, 2016

1917/18

1921/22

1925/26

1929/301933/34

1941/42

1945/46

1949/501953/54

1957/581961/6

2

1965/66

1969/701973/74

1977/78

1981/82

1985/86

1997/98

2013/141989/90

2001/02

2017/18

1993/94

2009/10

2005/06

Inflation adjusted historical wheat prices

Dec-18

Jan-19Feb-19

Mar-19Apr-19

May-19

Jun-19 Jul-19Aug-19

Sep-19Oct-

19Nov-1

9Dec-1

9Jan-20

Feb-20Mar-2

0Apr-2

0May-2

0Jun-20 Jul-20

Aug-20Sep-20

Oct-20

Nov-20

Dec-20

620

600

580

560

540

520

500

480

460

Source: CME Group, 2018

Forecasted wheat prices

3,000

2,500

2,000

1,500

1,000

500

-

1980/81

Grain ProductionG rain Consumption Source: OECD-FAO, 2016

1982/83

1984/851986/87

1988/891990/91

1992/93

1994/951996/97

1998/99

2000/01

2002/03

2004/05

2006/07

2008/092010/11

2012/13

2014/152016/17

Global Grain Production and Consumption (million tonnes)

Sources:

1 United States Department of Agriculture, 2017, world agricultural production

2 Food and Agriculture Organization of the United Nations, 2017, crop prospects and food situation

3 Worlds Top Exports, 2018

Sources:

4 Lyddon, C, 2016, Another record breaking harvest

5 ABARES, 2016, Agricultural commodities September quarter 2016; ABARES, 2017, Weekly Update; Labour Solutions Australia, 2012, Coarse Grains; Bloomberg, 2017

Global Grain Industry

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Investment Strategy

Australian grain industry

In 2016/17, Australia produced 45 million tonnes of grains from 22.9 million hectares, generating $13.5 billion in revenue. The Australian grain industry exports approximately 60% of this production (by value and 70% by volume), with the other 40% being consumed domestically1. Grain production is predominantly focused in New South Wales, Victoria, South Australia and Western Australia.

Sources:

1 ,2, 3 Grain Growers, 2016, State of the Australian Grain Industry

4 World Trade Organization, The Agricultural Agreement

Why Invest in the Australian Industry?

Export Market

The majority of world grain crops are consumed

in developing countries. Population growth and

continuing economic development are key drivers

of increasing global grain consumption. As global

population grows, the demand for grains will increase

more rapidly. Grain is required not only for human

consumption, but also as feed for animals.

Demand, especially within emerging economies,

is forecast to outstrip supply, which will continue to

support a strong export market. The Australian grain

industry is well positioned to meet this increasing

demand.

Free Trade Agreements

While Australia is well positioned geographically

and has a low cost of production, the ability to

penetrate emerging markets has been constrained

by government intervention in large grain-

consuming countries3. This government intervention

has historically distorted market signals in the

international market and encouraged additional

production at a price less than the real cost of

production. However, the World Trade Organisation

(WTO) has implemented an agreement to end global

agricultural export subsidies4. Under this agreement,

tariffs on Australian wheat exported under the

ASEAN FTA were eliminated in 2016 (to all countries

except Laos and Cambodia). All tariffs on other

grains exported under this FTA will be eliminated

by 2020. The removal of these subsidies is likely to

increase Australia’s competitiveness in the global

grain market.

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Investment Strategy

Asian countries account for 63% of Australian grain export , 30% of which goes to S.E Asia1

Sources:

1 Grain Growers, 2016, State of the Australian Grain Industry

– 18 –

Source: OECD-FAO, 2018

2,500,000.00

2,000,000.00

1,500,000.00

1,000,000.00

500,000.00

0.002017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Grain Production Grain Consumption

Forecast Grain Supply and Demand in Developing Countries ('000 tonnes)

Why invest in the Australian Industry?

4x Positive, green,

clean reputationConsistent high quality Australian grain exports

account for 10% of the global market

($8.1BILLION generated in 2016)2

Increased exports to China over the last

6 years

Sources:


Australian Grain Industry

– 19 –

Economic observations

Sources:1 Savills, 2018, Global Farmland Index

2 IBISWorld, 2016, Grain Growing in Australia


4 IBISWorld, 2016, Grain Growing in Australia

5 ABARES, 2016, Agricultural Commodity Statistics 2015-16

Australian farmland per hectare is the cheapest in the world to

produce a tonne of wheat1. Globally, the average increase in the

cost of land for production of a tonne of wheat over the past five

years was of 8.6% (in USD). Furthermore, farmland values in the

region of the Company are undervalued compared to the three-

year average value for the wheatbelt regions.

The Australian grain industry is predominantly family owned.

Production focuses on both summer and winter crops, categorized

by four types of products: wheat, coarse grains, legumes and

oilseeds. Australia’s primary crop is wheat and production

Australian farmland per hectare is the cheapest in the world to produce a tonne of wheat1. Globally, the average increase in the cost of land for production of a tonne of wheat over the past five years was of 8.6% (in USD). Furthermore, farmland values in the region of the Company are undervalued compared to the three-year average value for the wheatbelt regions.

accounts for approximately half of the country’s total annual grain

production. The largest domestic market for Australian grain is

the livestock industry, accounting for 20.4% of Australia’s grain

production². In 2016, the grain industry generated $13.5 billion3.

Driven by growing demand, the grain industry is forecast to

generate annual revenue growth of 2.1% per annum over the next

five years4.

Production by State (5-yr average 2010-2015)


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Analysis shows that on average between 1993 to 2016, Australian

grain farms demonstrated low correlation to Australian equities

and Australian bonds. This suggests that including an Australian

grain farms investment in a portfolio may provide diversification

benefits.

Inflation Hedge

Historically, global farmland has served as an effective inflation

hedge. Australian farmland has historically exhibited a positive

correlation to inflation. This suggests that Australian grain

farms may be an effective hedge against inflation and a capital

preservation vehicle.

Real assets, such as farmland, generally perform well during

inflationary periods for a number of reasons, including:

• the permanent and tangible nature of the assets mean the value of

these investments tends to rise as inflation rises

• agricultural commodities are significant components of the

Consumer Price Index. As commodity prices rise with inflation, the

profitability and land value of farmland increase and

• farmland is a finite resource

Out Performance

Over the past 20 years, Australian farmland values have generated

annual growth of 6.6%, on average. NSW farmland values over the

same period have demonstrated average annual growth of 7.0%².

In comparison, inflation has averaged 2.8% over the same period.

Throughout the Global Financial Crisis, NSW agriculture showed

positive growth in land values, unlike other property investment

sectors3.

Analysis of Australian grain farms with gross turnover greater than

$1 million shows that these farms outperformed,on a risk adjusted

basis, Australian equities, Australian bonds and inflation between

1993 and 2017. Over the period, Australian grain farms with gross

turnover greater than $1million generated annualised returns of

9.60% per annum. In comparison,Australian equities generated

an annualised return of 9.50% per annum and Australian bonds

generated 6.56% per annum. Furthermore, these grain farms

exhibited lower volatility than the traditional asset classes, such

as equities and bonds, over the same period, producing a more

attractive risk/return profile4.

Economic observations (continued)

Grain Farmland

Australian grain production is predominantly focused in three

broad regions; the Northern region, comprising Queensland and

northern New South Wales; the Southern region, comprising

central and southern New South Wales, Victoria, south-eastern

South Australia and Tasmania; the Western region comprising

Western Australia. Grain production by state is shown above.

In 2015, the NSW grain industry was valued at $2.85 billion,

representing approximately 30% of Australia’s total industry

production1. The central and southern cropping regions of

NSW are characterised by their diverse range of soil types and

dependence on seasonal rainfall.

Some key considerations for investors in the Australian Grain and Agriculture Industry

Out Performance

Investment in farmland has the potential to generate both capital

and operating returns through a combination of appreciation in

the land value and the income from the sale of the commodity

produced on it. Historically, global agriculture has outperformed

traditional asset classes such as equities and bonds on a risk

adjusted basis. Australian agriculture has also historically

generated risk adjusted returns greater than these traditional

asset classes. Australian agriculture has historically, on average,

generated risk-adjusted returns greater than Australian equities

and Australian bonds. Analysis of Australian grain farms with

gross turnover greater than $1 million shows that these farms

outperformed Australian equities, Australian bonds and inflation

between 1993 to 2016. Furthermore, these grain farms exhibited

lower volatility than the traditional asset classes, such as equities

and bonds, over the same period, producing a more attractive risk/

return profile.

Low Correlation

Global farmland has historically demonstrated low correlation to

traditional asset classes, such as equities and bonds, providing

diversification benefits to an investment portfolio.

Wheat

Barley

Sources:1 ABARES, 2016, Agricultural Commodity Statistics 2015-16

2 Rural Bank, 2018, Australian Farmland Values 2017

3 Eves, C, 2016, ‘The analysis of NSW rural property: 199-2014’, Queensland University of Technology

4 Calculations completed by Duxton Capital (Australia) using data sourced from the Department of Agriculture and Water Resources AgSurf database


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50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

-10.00%

-20.00%

-30.00%

-40.00%

-50.00%

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

2010 2011

2012 2013 2014 2015 2016 2017

Australian Wheat and Other Grain Farms >$1m

Australian Bonds Australian Equities

Source: ABARES AGsurf, Bloomberg and Market Index

Returns of selected asset classes (1992-2017)

$12,000

$10,000

$8,000

$6,000

$4,000

$2,000

$-

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

2010 20112012 2013 2014 2015 2016 2017

Australian Grain Farms >$1m Australian Equities Australian Bonds

Source: ABARES AGsurf, Bloomberg and Market Index

Value of $1,000 invested in 1992


– 22 –

Our Team

Who we are

Angus McLaren

Head of Acquisitions and Portfolio Management.

Responsible for the

management of all

farm assets in the farm

portfolios, performance

of valuation analysis and

due diligence during

property acquisitions,

deal sourcing and

negotiating acquisition

terms, tenant sourcing

and ongoing relationship

management

Daniel Köppel

Head of International Marketing

Responsible for

international client

services, marketing,

counseling on farm

holding structures

and relationship

management as well

as strategic planning.

Daniel has over thirty

years experience in

the international

finance and funds

management industries

Oscar Freeman

Acquisitions and Tenant Relationship Manager

Oscar focuses

primarily on property

management,

acquisition due diligence

and developing tenant

relationships in his role

with Miller & James

with a special focus

on Northern NSW and

Queensland. Before

commencing work

with Miller & James,

Oscar graduated with a

Bachelor of Agricultural

Business Management

from Charles Sturt

University.

Bruce Holden

Acquisitions and Tenant Relationship Manager

Bruce focuses on

due diligence of

property acquisitions,

modelling infrastructure

improvement projects,

property management

and tenant relations.

With over thirty years

of practical farming

experience behind him,

Bruce understands what

makes the difference

between a good farming

system and a great

farming system.

– 23 –

Investment Strategy

– 24 –

www.millerandjames.com.au

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