The business of getting it right

In a complex global industry, there are many factors at play in the achievement of farming performance.

3 April 2014, Words by Ian Bailey

 

Agriculture is a complex industry where investment is generally medium to long term. Achieving top performance of the farming operation and adding value along the supply chain is key to maximising investment returns.

This is especially so in the emerging markets where farming businesses have been inefficient (small and fragmented) and under-resourced (capital and skills).

However, many of these regions have significant resources in terms of land, water and labour.

A popular vehicle around the globe which is attractive to both investor and operator is the sale and leaseback proposition (see bottom of page).

The agricultural value chain consists of three core areas:

Primary inputs – including land, variable crop and livestock inputs, machinery and equipment, and labour

Production and processing – including raw commodities, primary and value added processing, and packaging

Transportation and infrastructure – including storage, reservoirs, transport (shipping, rail and roads) and communication.

Agriculture operates in a global market and prices (input and output) are influenced by factors around the world. Planting and harvesting dates vary across the world (see Table 2.1) and the weather throughout the growing season and at harvest can directly impact on global commodity markets and demand for inputs such as fertiliser.

The efficient use of labour and machinery, both significant costs, will depend on the local labour markets and the ability to source large and highly productive modern farm machinery suitable for the scale of the farming operations.

At a local farm level the timeliness of crop planting can have a very significant impact on yields and therefore output. For example, drilling soya after November in Mozambique can compromise yields by up to 50%.

Table 2.1
Production inputs

Most direct production inputs, including seeds, fertilisers and sprays, operate in global markets. The underlying prices are generally similar across the world with the cost of transport and exchange rates creating any local variations.

The price of these inputs is often demand driven and is becoming increasingly seasonal, for example fertiliser demand relative to conditions at planting time.

In addition, especially in the emerging markets where transport links are poor, distance from market can have a significant effect on price and therefore crop margins. This is an important message throughout this report and some of the key constraints are illustrated on here.

Infrastructure investment or locating the farming business near a port, market consumer hub such as a mine or sound road or rail network can mitigate these pressures on profits, providing the other agronomic factors are suitable.

In our experience scale is important as illustrated by our case study from Trigon Agri.

Knowledge of policy

A knowledge of national and international policy and legislation is important. In several countries, especially within the EU subsidies can make a significant contribution to incomes. The influence of these factors can be very significant on incomes, capital values and sustainability.

In the emerging agricultural markets infrastructure, management and performance are the key factors which determine the success of a project.

Emerging markets can offer good opportunities to add value to current performance through investment in:

Infrastructure: To reduce transport costs and improve output through storage, irrigation and drainage.

Processing facilities: To increase local capacity and drive up value for investors and local farmers.

Technical and management expertise: To raise efficiencies and increase profits.

The latest technology and research: To increase output and quality.

New domestic and international markets: Many emerging markets are members of trade agreements. Through these, they have market access to many regions.

Income performance

As with capital values it is difficult to find robust comparative data and the range of farm profitability can be significant.

However, using available data and our own knowledge, Graph 2.1 illustrates the potential income yields* achievable by top performing farming operations.

There will be annual fluctuations due to climate variations, input supplies and price volatility.

The graph illustrates the potential performance in the emerging markets where there are greater opportunities to add value. This can be done through improving ouput quantity and quality, increasing the efficiency of systems and adding value to the output.

Income performance in mature markets, especially when combined with capital growth, still exceeds alternative assets and carries a lower risk and level of application and therefore should not be discounted.

* Net income returns are net income as a percentage of working and fixed capital employed.

Graph 2.1
 
The case for Sale and Leaseback

Extensive cattle ranch including over 10,000 hectares in southern Zambia

The sale and leaseback proposition

■ Proven operational performance and management

■ Proven secondary market title on long leasehold in secure political environment

■ Guaranteed 5% yield on a leaseholder offer for five years

■ Well developed internal infrastructure with improvement opportunity

■ Good access and well located for market

■ Considerable lifestyle development opportunity

■ Significant capital growth expectation

Why sale and leaseback?

■ The investor: Reduced risk with proven management and operational structure in place, but provides opportunity for significant capital growth with a guaranteed yield and property enjoyment.

■ The operator: Provided with opportunity to release capital and maximise profit return whilst retaining control of business operations and remaining on farm.

 
 

Key Contacts

Ian Bailey

Ian Bailey

Director
Rural Research

Savills Margaret Street

+44 (0) 207 299 3099

 

Hugh Coghill

Hugh Coghill

Director
International Farmland

Savills Margaret Street

+44 (0) 20 7016 3818

 

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