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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.