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The Rural Property Investment Arbitrage - The Cost per MT factor

Written by: Luke Kenniff

Every since I started my career in commodity trading I have always had a keen eye for a spread trade or arbitrage opportunity. Given I am now in agricultural advisory supporting a range of investors in agriculture, the opportunities still remain at large. This phenomenon may be no news to some investors however it is clear that there are many opportunities within the market that are being missed by some. Clearly investors are putting capital to work in assets that may look attractive for long term annual returns and capital appreciation, but are they picking the best asset?

Many investors and operations within agriculture are passionately (and financially) invested where they currently reside. As a financier and now advisor I would have many discussions with owners and investors and they would clearly annunciate the the area where they reside is the best value by (sorry), a country mile. But is it?

To decipher value I would suggest that we leave the tradition forms of valuation to one side and look at property in a different dynamic to really see the value. I would also offer that you need to take a broad view and hold no preconceived ideas of value. Astute investors providers of capital i.e. Banks are moving closer towards how the asset really operates on a financial return to the business on an historical and future earnings basis. The role of the rural property valuer is important but less so in the new world.

 A simple but effective strategy to attain a value is understanding the cost per MT of commodity produced. Let's take wheat for example. It is noted that Australia as opposed to other global producers is on the low end of the spectrum of costs of the land per MT of production. Savills UK completed some analysis below from a global perspective and gave an insight that has twigged interest in this form of analysis.

Let it be clearly said though, this in only one dynamic in a whole raft of investment measures and influences. 

Using this analysis, we applied it across NSW gives some insight worthwhile to further review. The data below is based off recent sales / valuations, BOM data and agronomist feedback across the particular areas. As you will see, there is quite a spread of values and some of these values are influenced obviously by the cost of the land however also other factors such as production consistency, diversification (i.e.having a summer crop option), location and general topography and characteristics.

But I ask you; if the areas that you had or will invest are void of any emotional or geographical attachment and were just generic shares or commodities, where would you place your money? 

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