Interest in the role alternatives play in a portfolio has mounted in recent years as investors witnessed traditional assets put to the test against geopolitical risks, rising inflation, and the end of the zero-interest-rate policy era.
In its 2024 Long-Term Capital Market Assumptions, JP Morgan Asset Management (JPMAM) said alternatives continue to offer “powerful tools” supporting portfolio diversification, inflation hedging, and resilient performance.
One such alternative offering plenty of opportunity for diversification, according to Prime Value Asset Management, is Australia’s dairy industry, with the value of milk production predicted to hit $5.5 billion in 2024–25 as per recent figures from the Department of Agriculture, Fisheries and Forestry.
“Milk is a nutritional product that everybody consumes,” Kirsti Keightley, general manager, dairy investments at Prime Value Asset Management, said.
“Unless you’re lactose-intolerant, it’s an item you might use every day – it’s a staple in households.”
As the Australian economy faces cost crunches and slowing demand for various goods and services, Keightley believes milk is an outlier.
“Very few people go to the supermarket and don’t purchase a dairy product [in some form]. It’s not a luxury, so even when people are short on money, they’ll still buy dairy,” she explained.
As such, given dairy farming provides a number of high-demand products, its appeal to investors has increased. Moreover, supply and demand dynamics within the Australian dairy sector are favourable.
Namely, over the last two decades, Australia has experienced a decline in national milk production from around 11 billion liters to 8 billion liters. Consequently, the nation now allocates a majority of its milk output to satisfy domestic demand, a significant shift from its previous status as a net exporter of dairy products.
This is only set to increase with steep population growth predicted over the next several decades – Australia’s population is projected to reach almost 30 million by 2030–31, and 40.6 million by 2062–63.
Beyond its inherent demand, the dependence on the domestic populace renders local dairy farming as an asset class less susceptible to global uncertainties.
“Around 80 to 85 per cent of dairy product stays within Australia, which means there’s a huge domestic market here. That means we’re not so reliant on what’s happening overseas,” Keightley told InvestorDaily.
Additionally, what makes it even more appealing is the discontinuation of supermarkets’ discounted milk policy, along with the introduction of the Dairy Code of Conduct, which governs how processors engage with farmers.
These industry fundamentals are what led Prime Value Asset Management to create its Dairy Trust vehicle, which combines diversified exposure to 11 dairy farms and four support farms in south-west Victoria and north-west Tasmania.
Targeting total returns IRR of 12 per cent per annum, the Prime Dairy Trusts has returned some 44.4 per cent since its inception in December 2019.
“Even during COVID, a lot of industries were affected, but [the period] was good for the fund because instead of going out, people were staying at home and making their coffees, or cooking, or baking … Sales in supermarkets actually went up during this time.”
An alternative property play
But dairy farms do not only offer stable income through distributions, also serving as a lucrative “property play”, as highlighted by the fund manager, leveraging capital growth across its expansive portfolio spanning over 5,800 hectares of agricultural land.
“This is also a property investment. You’re standing on land and you’ve got guaranteed capital growth, so it’s an income and capital growth investment,” Keightley said.
Since initiating the fund in 2019, she remarked that they had successfully “got their timing right”, observing a significant increase in land prices over the following years.
“In south-west Victoria, the capital growth of land over a 20-year period is about 7 per cent while in north-west Tasmania, it’s about 8 per cent – so it’s kind of like a guaranteed return,” she said.
Significantly, the firm has honed in on regions boasting high rainfall, strategically acquiring farmland and consolidating it, along with obtaining water rights in locales renowned for their water security. In Tasmania, where underground water is free unlike in other Australian states, the firm’s management made the proactive decision to irrigate.
“This does two things. One, there’s a value to the water in the future. The fund aims to return 12 per cent and we haven’t put the value of water in that figure,” she said.
“Also, we have water to irrigate the pastures if it runs dry. We were very specific about where we built the farms and we took climate change into account, so we went into high rainfall areas where it’s reliable with good returns,” she said.
The fund’s diversified portfolio also now features a beef offering, with the launch of an online beef shop catering to family, friends, and investors alike.
“There’s stability [in this investment],” Keightley told InvestorDaily.
“It’s providing food to a growing population. You can invest in share markets, which can be affected by a lot of [factors] but with dairy farming, there’s more demand than supply. We’re also mitigating a lot of the risk by irrigating the land, and this is a property play with capital growth.
“It’s a solid investment.”
Prime Value’s Kirsti Keightley will further elaborate on the compelling opportunity in dairy farming in an upcoming webcast on alternative investments, hosted by InvestorDaily.
