Macquarie bets on milk

Wall Street Journal | 30 November 2011
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Macquarie now offers a combined investment and farm management function for more than 3.6 million hectares, including sheep, beef and dairy cattle, crops and forestry. (Photo: Bloomberg)

By Gillian Tan

As people in emerging markets change their diets to include western delights like cheesy pizza, one Australian investment bank is positioning itself to benefit.

But profiting from dairy can be a complex business, according to Macquarie.

The fact that dairy cows take two years to lactate is just one of many considerations for Macquarie Agricultural Funds Management co-head Tim Hornibrook who oversees more than US$1 billion in assets under management and 200 employees across associated businesses, most of whom are farmers.

Identifying an industry with attractive supply and demand fundamentals in 2003, the group now offers a combined investment and farm management function for more than 3.6 million hectares, including sheep, beef and dairy cattle, crops and forestry.

“It’s an attractive thematic because the global population is growing by 80 million a year, driven by emerging market countries where an increased standard of living has a direct correlation into a demand for  more protein and processed foods,” Mr. Hornibrook said.

On the supply side, influencing factors include decreasing availability of arable land on a per capita basis, diversion of agricultural produce into biofuels, water scarcity, changes in both government policy and infrastructure and the fact that arable land available for agricultural production has shrunk 50% on a per capita basis over the last 40 years.

Just like any equity fund manager, Mr. Hornibrook understands the importance of diversifying risk.

“By owning multiple farms across diverse climatic regions we can better manage weather risk and by owning farms that produce a range of products for a range of different markets, we can better manage product and price risk,” he said.

Mr. Hornibrook is a keen believer that funding for productivity improvements needs to come from the private sector given governments of developed nations aren’t identifying food security as a pressing concern relative to other issues.

And contrary to popular belief, for a sector that’s worth upwards of US$1 trillion globally, Mr. Hornibrook believes only around US$25 billion of institutional capital has been allocated to date.

“That tells you it’s a sector that hasn’t been overbought and the upside is still in front of us,” he said.

The group – with offices in Australia, Europe, Asia, North and South America– in addition to looking at which countries are suitable agronomically for the commodities they believe give appropriate exposure to the agricultural investment thematic, also focus on countries that are the low-cost producers, large net-exporters, are profitable without the benefit of government subsidies, and where compared to peer producing countries political risk is low.

Macquarie is among the top five managers of farm land globally including Hancock, TIAA-Cref, Altima, UBS Agrivest and has been involved in agriculture for over 20 years as a longstanding provider of agricultural risk products, agribusiness advisory and commodities research.

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