For all the willing buyers seeking tracts of Australian farm land, local investors are not among them. They wonder what all the fuss is about.
Years of weak and volatile returns and some of the harshest weather on earth suggest a wave of foreign interest in Australia's farms and agricultural assets is on a fool's errand.
"Overseas investors are too dumb to realize that they are not going to make money out of Australia agriculture," said David Leyonhjelm, an Australia-based agriculture consultant at Baron Strategic Services.
He may have a point.
Australian farms' return on capital has seldom exceeded more than 2 per cent in a year on average during the past decade, excluding changes in land values, according to government research bureau ABARES. That is less than half the return on stocks and less than a third compared with bonds, figures from Russell Investments suggest.
Although farm returns are volatile anyway – owing to the vagaries of the weather – the unpredictability of Australian earnings is much greater than in the United States.
In the past 30 years, Australia's net farm income has experienced annual drops of more than 40 per cent on five occasions compared to just once in the United States, data from ABARES and the U.S. Department of Agriculture shows.
Including capital appreciation, Australian farm returns have been outstripped by Africa and Brazil. Australian farm debt has risen some 8 per cent a year since 2001, almost double the pace of U.S. farm debt.
Even when it comes to the weather, Australia seems worse off.
It has the lowest and most variable rainfall patterns of any inhabited continent, due largely to the El Nino-Southern Oscillation climate pattern that periodically bakes much of the country in hot, dry weather and intersperses it with flooding rains.
"In recent history, Australia has seen more volatility in agricultural farm output than other major agricultural producers," said Michael Creed, agribusiness economist at National Australia Bank. "In the past 20 years alone, we've had a drought that lasted a decade and when the drought broke, it broke in a massive way."
Despite the weak and volatile returns, the explosion of the middle classes in Asia is attracting more offshore investors looking beyond immediate returns to an expected long-term surge in demand for high-quality food.
The UN Food and Agriculture Organization says the world needs to boost food output by 70 per cent by 2050 to meet demand, a sobering statistic for highly populated countries such as China, where a major tenet of the Communist Party is guaranteeing food security for its 1.3 billion people.
Chinese investors have been involved in a number of high-profile farm deals, including the purchase of the country's biggest cotton farm, the 1,000 sq. km. Cubbie Station.
Chinese entities are also in the running for a large dairy operation in Tasmania and a big irrigation project in Western Australia.
U.S firm Archer Daniels Midland last month made a $2.8-billion (U.S.) bid for Australia's last major independent grain handling company, GrainCorp, spurring a 40-per-cent jump in its share price.
Australia lacks comprehensive data on foreign ownership but the government says the vast majority of farms are locally owned and that has not changed much over the past 30 years. But spurred by a number of high-profile foreign deals, the issue has become politically sensitive as the sector struggles to attract much-needed investment at home.
Despite local skepticism at the prospects for Australia's farming sector, the increase in offshore interest comes at a time when returns have seldom been better and adds to other evidence suggesting the foreign investment may not be mistimed after all.
Helped by generous rains and strong global prices, Australian farmers may have enjoyed the best year in decades in 2011/12.
"For the first time in more than 30 years, all states and all industries are expected to record positive farm business profits and rates of return," ABARES said in its 2011/12 annual crop and livestock farm performance report.
Average farm cash income jumped to A$117,300 ($122,000) in 2010/11 from just A$59,470 the previous year, it said. This year is forecast to remain a strong A$116,000 – almost 40 per cent above its real, long-term average.
GrainCorp, the target of Archer Daniels, last week posted a record profit of A$205-million, boosted by a bumper crop. It said the takeover bid failed to reflect the promise of the business.
Some analysts say a global rush for agricultural land is just beginning, driven by increasing concerns over long-term food and water security. With the availability of suitable farmland shrinking and productivity gains slowing when populations are growing and diets changing, supply/demand dynamics are likely to be favourable over the next 40 years, an ANZ report says.
Another study, by real estate company Savills, identifies Australia as having some of the lowest land costs for wheat production in the world and highlights the appreciation in farmland values since 2002.
Shandong Ruyi Group, which bought Cubbie Station, is taking the long view, company adviser Ian Smith said.
"They are not dictated by the short term and they also have a proud track record of maximizing the assets over the longer term," he said.
Underscoring the gap between the short and the long view, Laguna Bay Pastoral Co., an agricultural investment fund advised by U.S. commodities trader Jim Rogers, was forced to seek investors offshore because of a lack of interest in Australia.
"We were presented to most local funds. Most Australian local pension funds don't have agriculture assets allocation," Laguna founder Tim McGavin told Reuters.
"We have been forced to market to overseas just because the general lack of understanding and interest in agriculture."
Laguna secured its main seed funding from U.S.-based Global Endowment Management, and now aims to buy and privatize PrimeAg Australia Ltd., an investor in rural property and water assets.
Australia's vast pension funds industry, sitting on $1.4-trillion and looking for long-term diversified assets, has largely shied away from the sector. Even The Future Fund, Australia's $80-billion sovereign wealth fund, has no direct exposure to the country's agricultural sector.
Still, Pauline Vamos, the chief executive of the Association of Superannuation Funds of Australia, said interest in farm assets is picking up after some ill-conceived and poorly managed projects had put off local investors.
"You've had cotton farms built in the middle of the desert, you've had timber plantations built miles from any infrastructure – these schemes were never going to make any money," she said.