Merricks Capital Agriculture Credit Fund Report – May 2023
The Merricks Capital Agriculture Credit Fund (the Fund) returned 1.0% in May and 9.8% on an annualised basis since inception. The underlying loan performance lifted during the month as floating rate loans benefited from cash rate increases in New Zealand (+0.25bps) and Australia (+0.25bps). Higher interest also accrued on two loans, one for late payment of interest and the other for an estimated two-month delay relating to the loan exit.
The new farmgate milk price for the 2023/24 season was announced at the end of May. The opening farmgate milk price has significant implications for dairy farmers and processors. Fonterra Australia opened with $8.65 per kilogram of milk solids for 2023/24, a 10% cut to the 2022/23 average farmgate price. We expect an upwards price movement of 5% as dairy companies bid to lock in seasonal milk supply over the coming weeks.
The Fund has an 8% exposure to farmgate dairy, a dairy farm portfolio in north-west Tasmania. The investment has a low LVR attachment point (<55%), with a loan exit expected via property sales in less than six months. The Fund also has investments at a dairy processing level (10% FUM), including an investment in a specialised dairy and non-dairy (plant-based product) packaging plant in Melbourne’s west and another investment in a milk processing plant in western Victoria. A 5% lower milk price will support improved margins for these processors, and on a like-for-like volume basis, lift EBITDA by an estimated total of $4m-$6m across the two investments.
Three loans made partial repayments during the month via property sales totalling $12.7m. The sales occurred across meat & livestock and mixed farming sector investments. Agricultural land values appear to be holding across the transactions we’re seeing. We note a trend for vendors positioning assets as carbon offset opportunities or cross-purpose with renewable energy projects (recently, we’ve seen solar and wind). We also received property sale contracts on two loans during the month; one sale contract for Riverina assets that will result in full repayment of the Fund’s allocation and the other contract for land in Western Australia that will be a partial repayment and reduce that investment’s LVR to less than 40%.
We’re currently assessing $210m of new funding opportunities across horticulture, meat & livestock, cropping and glasshouses with forecast weighted average investor IRR of 11.2% (net of fees and costs) and LVR of 57%. We continue to be highly selective around capital deployment, with funding demand outpacing supply across the market.
Merricks Capital Partners Fund Portfolio and Market Update May 2023
The Merricks Capital Agriculture Credit Fund (the Fund) returned 1.0% in May and 9.8% on an annualised basis since inception. The underlying loan performance lifted during the month as floating…