Strong demand for short-term acquisition finance in agriculture
26th January 2023Agriculture Investors
Three years of above average farm income and growing land values have driven a generational wave of acquisition activity in the agricultural sector.
- Approximately 50% of agriculture loans funded by Merricks Capital are used for real estate acquisition. These loans are varied across sector, geography, size and level of the supply chain.
- These investments are generally of 18 – 24 month duration and shorter than typical commercial property development investments. There is alignment with borrowers to implement a strategy over the course of their loan to facilitate debt reduction, allowing the borrower to go back to a traditional source of finance.
- During the last 12 months, we have seen the highest demand for acquisition finance from beef producers and cereal growers who seek horizontal integration to achieve economies of scale. These growers pursue value creation by reducing costs, creating succession plans, and improving the quality of their land holdings by moving into higher rainfall regions and diversifying their geographical exposure.
- Favourable growing conditions and commodity prices trading above long-term averages have also driven acquisition demand as land prices have appreciated at the fastest rate in three decades.
- To mitigate the risk of an asset price correction in the sector, we take a conservative view on current valuations, reflected by a 59% average weighted LVR across our agricultural loans.
Source: Rural Bank, RBA, Merricks Capital
- A common strategy we see from our borrowers is to acquire, consolidate and deleverage. Over the past 12 months, five acquisition financing loans totalling $75m have been exited by sale to institutional investors (2 loans), property sale (1 loan) and bank refinance (2 loans).
- Over the past five years, Merricks Capital has deployed over $1bn into the Australian and New Zealand agricultural sectors as short-term transitional credit. Agricultural lending is a core pillar of our senior secured credit strategy, comprising 28% of the $1.1bn Merricks Capital Partners Fund, in addition to the $357m of the Merricks Capital Agriculture Credit Fund which is wholly agricultural credit or adjacent supply chain investments.
Migration upside creating an investment opportunity
Three years of above average farm income and growing land values have driven a generational wave of acquisition activity in the agricultural sector. Approximately 50% of agriculture loans funded by…