This is the third of four articles where Brown & Co explore the market opportunities around permant crops. Brown & Co are witnessing increasing investor interest around permanent crop options – which is partly being driven by portfolio reviews as a result of the COVID-19 impact on markets worldwide.
With the correct research, due diligence, management and access to market investors can, in some cases, generate stronger returns than typical row crops such as corn, wheat and oilseeds. Row crops such as wheat and corn have long been a staple of farmland portfolios. A number of institutional investors diversified some years ago into permanent crops with the intention of increasing returns as typically 4-6% cash on cash returns are considered acceptable compared to 3-4% for row crops. Indeed with land appreciation factored in, many permanent crops in key markets have consistently achieved 10+% over extended periods of time.
Underpinning all of this is the fact that a number of permanent crops are witnessing an increase in consumer demand, particularly as health foods and snacks are landing in shopping baskets with increased frequency. For example, last year (2019) global tree nut production reached a record level of circa 4.5 million metric tons as consumption trends continued positive growth. Brown & Co have recently published articles on blueberries and Hazelnuts in the CEE region but there are also other high value permanent crop options. This is the third of four articles where Brown & Co explore other market opportunities in the permanent crop space.
Avocados have a highly unusual historic growth trajectory, with some regions now referring to the fruit as “Green Gold”. Global market growth for the period 2020-2024 is estimated to be USD 4.37 billion, a CAGR of 6% during the forecast period. Supply of avocados has grown rapidly in recent years particularly from South America. It is widely believed that the European market has room for growth and can absorb much higher volumes going forwards. According to the Ministry of Foreign Affairs for Europe, average European consumption is 1.05 kg per capita whilst in the United States this is 3.5 kg, in Canada 2.5 kg. Mexico very much leads the charge for both production and consumption, as the world’s largest avocado producer it consumes 6.5-7 kg/capita.
The healthy nature and multiple uses of avocados result in strong consistent, year round consumer demand for the fruit. Increased consumption is being driven by market demand for a nutrient dense food capable of providing numerous health benefits which contains a range of nutrients (vitamins C, B5, B6, E, and K), potassium, folate, protein, and “healthy fats”.
Australia, as a key production region is where one of the main opportunities lies – either in consolidation or new investments – particularly with its access into the growth markets of South East Asia. Brown & Co believe that trends surrounding sustainable production are only going to increase in their importance going forward and therefore finding a developed country which has a good reputation on the global market as a sustainable, responsible food producer together with established robust supply chains is key. In parts of South America many importers are starting to look at the sustainability of avocado production particularly in regard to deforestation and water use. From a macro perspective Australia offers political stability with a key focus on its agricultural supply chains, their efficiency and sustainability. In terms of the key areas, Queensland continues to produce the majority of Australian avocados, with 55% of production. Western Australia produces the next largest share at 30%. Productivity is increasing – the previous 5 years (below graph) production volumes show an 11% average increase YoY of produced tonnes. Simultaneously farmgate prices have experienced a 192% uplift between 2008-2019. This production increase is further supported by strengthening export values; over the last four year period export values have increased by an average of 35%. The vast majority of these exports reach Malaysia (44%), Singapore (40%) and Hong Kong (11%) all of which are showing signs of consistent growth of what is still a relatively niche high value fruit.