December 9, 2022

Merricks Capital Agriculture Credit Fund Portfolio and Market Update November 2022


The Merricks Capital Agriculture Credit Fund returned 0.9% in November and 9.3% on an annualised basis since inception.

Production from the Australian agriculture sector has risen in latest forecasts from ABARES, despite major flooding events in the second half of 2022. Forecast agricultural production is $85bn for 2022/23, almost level with the record set last year. High crop yields and high commodity prices are the driving factors behind the strong performance. World grain prices remain elevated due to uncertainty surrounding exports from the Black Sea region, and persistent dryness in the US, EU and Argentina. Wheat exports alone have accounted for $1bn of the +$5bn of agricultural product exported every month this year.

Flooding in the Murray Darling Basin is expected to peak in Mildura early December with much of the north-east coast already returning to normal. We have one asset located near Mildura which is expected to have a small portion of the vineyard waterlogged during the peak of flooding. Preparation for the peak is being well managed by the borrower with recent site visits showing efforts to use earth levees to minimise flood damage. We have no assets at risk further downstream of the Murray and once the peak of flooding passes Mildura we expect no further impact to borrowers.

The sector outlook for rural property land prices is optimistic. Rabobank forecast Australian agricultural land prices will continue to climb for at least the next five years. Within the portfolio we are seeing properties transact at or close to valuation, however time on market to reach a sale appears to be increasing as fewer buyers compete for assets. As we assess new investment opportunities, we are actively pushing for lower LVRs (<60%) than 18-24 months ago (<65%) when there were clear tailwinds behind appreciating rural property prices. This structuring will mitigate the risk that properties may take longer to transact at loan expiry or rural valuations may soften as cost of capital rises.

One smaller $3m loan was repaid in November, a mixed farming business in New South Wales which was refinanced by a bank. We are progressing with due diligence on $75m of opportunities with an expected weighted average IRR of 11-13% (forecast, net of fees) at <55% LVR. We continue to see favourable seasonal conditions and tighter credit markets driving demand for acquisition and development finance in the space.

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