Posted by Macquarie Asset Management
July 17, 2020
Over the past few years, it has become increasingly clear that sustainability and profitability in agriculture are intrinsically linked.
Our clients are predominantly pension funds and insurance companies, and those investors are seeking stable cash flows that match their long-dated liabilities. The way we consistently deliver that in agriculture is by building resilient farming operations and by driving efficiencies in the way we work. That is where sustainability really comes into play, helping us to lower our costs and maximise productivity across our operating companies in Australia and Brazil. It also offers an important lens through which we can identify and manage risk.
In many ways, the agriculture sector has had a bit of head start on the sustainability front. Over the past few decades, consumers have taken a strong and growing interest in where their food comes from. They want an assurance that what they are eating was not produced in a way that was harmful to the environment or to animal welfare. But the focus for us has really moved beyond just minimising our impact. Producers in our sector now understand that they have a unique opportunity to drive positive change too. We can tackle some of the big problems facing our world, helping to build a more sustainable society and environment.
Many farmers have seen the increasing volatility in climate conditions and are looking at their own operations to see how they can minimise their contribution to climate change and adapt to the new normal. This focus has intensified as governments around the world have set out their plans to achieve net zero, with every sector of the economy – including agriculture – to have an important role to play.
But how can we feed the world’s rapidly growing population and cut our emissions at the same time? Technology and innovation will clearly be a big part of the answer. Yes, we can find efficiencies in our energy usage, as we have done in Brazil with our farm machinery modernisation programme. But we also need to fundamentally rethink our processes if we are going to successfully decarbonise some of the more challenging areas of our operations. That is what we have been doing at Paraway, one of our operating companies managing large-scale sheep and cattle enterprises across Australia. Genetic improvements in our herd, improved pasture utilisation and water point optimisation are already offering a model for us to significantly reduce the emissions intensity of each kilogram of beef Paraway produces.
Another area in which agricultural producers can make a real impact is biodiversity. We consider ourselves stewards of the land, and with that role comes a responsibility to protect and strengthen the ecosystems in and around our properties. Our sector is getting better at measuring and managing the impact of our operations on soil and water systems, but we need to go beyond that. Our teams at Paraway and Viridis Ag – another of our Australian operating companies involved in broadacre row cropping – have been working to restore native vegetation corridors, supporting the local plant and animal populations whilst preventing erosion. They are also identifying and protecting high value biodiversity areas to protect threatened species, installing fencing and establishing watering areas.
We know that initiatives like these can make a real impact in creating healthy agro ecosystems. From a commercial perspective, investing to preserve and enhance the value of our natural capital just makes good business sense.
Elizabeth O'Leary, Head of Agriculture, Senior Managing Director
Those who are unfamiliar with our sector often think of agriculture as being low-tech. Of course, nothing could be further from the truth, with technology having already transformed the way we work.
For example, I know from our own experience how much value technology like data analytics can add when integrated effectively into day-to-day farm practices. Inputs like fertiliser and chemicals are a considerable expense for all farmers, and if over applied can also negatively impact river systems and greenhouse gas emissions. But precision farming technology has come so far over the past decade that we are now managing our land down to a metre by metre basis across many of our properties in Australia and Brazil. This soil mapping is now central to our approach to maintaining good soil health, with the technology helping us maximise yields whilst reducing financial and environmental costs.
Looking ahead, there are also some exciting technologies on the horizon that have the potential to drive further change in the sector. Although many smaller farmers typically do not have the resources to invest in research and development, we hope that some of the work we are doing to pilot the application of emerging on-farm technologies, like autonomous vehicles, will offer new ways for the agriculture sector to operate more sustainably in the years ahead.
What a relief! The widespread rainfall we saw over New South Wales and much of southern Queensland in recent months has offered some respite following one of the driest periods since official records began. Although it has been great to see farm reservoirs and river systems topped up across the region, we cannot afford to be complacent.
The availability of water has always been the most limiting factor in Australian agricultural production systems. By 2050, the government expects that Australia’s growing population and primary industries will cause national water usage to double1. With climate change already making our weather more unpredictable, it is vital that we use our most precious resource as efficiently as possible. As a sector, we need to take a long-term approach if we are to be better prepared for the next drought, when it inevitably comes.
Effective water management has been a major focus across our operations. At our Viridis Ag properties, for example, our farm management teams compare the amount of grain they produce to each unit of rainfall they receive. Those insights are helping to inform the use of techniques like retaining stubble left over from previous harvests or limiting where machinery drives across farmland, to drive meaningful improvements in the water holding capacity of the soil. Stemming water losses from run-off and drainage are obviously important, but producers also need to look at techniques such as these in the face of more frequent and intense droughts.
But it is not just about maximising productivity. As we have seen across regional Australia in recent years, extreme weather conditions like droughts and bushfires can also cause considerable social dislocation. I am very proud of the support our teams have provided to charities like batyr and Beyond Blue in the area of mental health, but we know many more farmers will face hardship in the years ahead if the agricultural sector does not adapt to our changing climate and the drier weather it will bring.
It has been devasting to watch the human toll of this pandemic rise around the world. Agriculture as an asset class has demonstrated huge resilience during this period. Demand for food and core fibre products, including hygiene products, has remained resilient – more than offsetting the softening in demand from the food services sector.
It is also important to consider the long-term fundamentals for agriculture. Global demand for protein is growing as the world’s population gets bigger and incomes in many regions rise. At the same time, the amount of arable land available for agriculture is declining. We see these structural trends acting as strong tailwinds for both commodity and land prices in the years to come.
1 Department of Agriculture, Australian Government Drought Response, Resilience and Preparedness Plan, Canberra, November. CC BY 4.0.
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