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Australian Agricultural Company Limited (ASX:AAC), Agricultural Land Trust (ASX:AGJ), Tassal Group Limited (ASX:TGR)

As Australia’s mining boom slows, its long dormant agricultural sector is expected to be the country’s next engine of growth.

The United Nations has forecast that food production will need to ramp up 70% by Y 2050 to meet growing demand with prices expected to rise in the decades ahead. By Y 2020 the number of middle-class consumers in Asia is expected to increase by more than 1.2-B, a growth that could drive Australia’s goal of becoming the “Food Bowl of Asia.” This could mean a lot for Australia, a country rich in arable land but lacks the needed capital to develop it.

The comparative advantage that Australia has in producing Key commodities such as beef, wheat, dairy and sugar, and the projected increase in global food demand by 35% by Y 2025 compared with Y 2007 levels makes Australia a compelling, and increasingly popular, destination for foreign capital in agriculture.

If Chinese investors come it is a “Win-Win” situation for both China and Australia since Chinese investments could generate local jobs and at the same time improve the two countries’ bi-lateral trade relations.

Economic expert David Thomas said that while China’s competitive advantage lies in its infrastructure, infrastructure bottlenecks and underinvestment are widely regarded as major constraints in Australia’s growth.

“Australia’s reputation for quality and its strong regulatory system place it as an attractive agri-destination for Chinese businesses and investors. However, despite this enormous opportunity for growth, a great deal of fear exists among Australians regarding food security, foreign investment and the potential for a monopoly and pricing interference,” Mr. Thomas said.

He went on to say that much has been written about the pros and cons of foreign investment in Australia but on investment in agriculture, the proposition for Chinese investors is simple.

“By investing in food production – infrastructure, technology, research and processing capabilities – the Chinese are offering Australian farmers and food growers the opportunity to double (or treble) their production while halving their costs. The surplus can be exported at a profit to emerging consumers in Asia,” Mr. Thomas said.

China rests at the heart of Australia’s economic future and despite the Gillard government’s much touted budget surplus already evaporating, there is confidence that China’s demand for natural resources will sustain Australia through a period of transition from “Rocks to rRce,” in the words of UNSW’s JW Neville Fellow and former Austrade Chief Economist Tim Harcourt.

According to research from Deloitte Access Economics, the Australian mining investment boom has only 2 further years to run. The forecast suggests a watershed in Australia’s economic strategy, pushing agriculture back into focus.

“The strong bit of Australia’s 2-speed economy will not stay strong for more than another 2 yrs or so… Mining companies are making it clear the current spike in investment is due to decisions taken a while back, whereas we are getting few new mining mega-projects across the line,” the report noted.

The Gillard government needs to get behind the Australian services left in the shade of the mining eclipse.

“With the slowdown in the resources sector, Australia needs to identify and support new trade options. Australia’s services industry is looking to the government to help open up new markets for Australian services, to satisfy demand in China’s rapidly expanding middle class. This goes beyond education and tourism to include architecture, engineering, financial services, legal services, health and the cultural sector,” Mr. Morgan said.

Mr. Morgan said Chinese investment could unlock new opportunities for Australia in other sectors of the economy, particularly in agriculture.

China’s investment in agriculture is small compared to its involvement in the mining sector.

Economist Shayne Heffernan said in a note to traders today “we are upgrading the outlook for Australian Agricultural exports and 3 companies,ASX:AAC, ASX:AGJ, ASX:TGR. The sector will do well regardless of the problems in the USA and Europe.”

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According to study made at the University of Sydney, since Y 2006 more than 90% of Chinese investment in Australia has been in the Mining and Oil and Gas sectors. In Y 2011, the Foreign Investment Review Board FIRB approved 4-M Australian Dollars (US$4.2-M) of Chinese agricultural investment out of a total of 15-B Australian Dollars (US$15.75-B) of total investment.

But when that investment concerns the purchase of agricultural land, Australian public opinion becomes polarized, generating ongoing concern from potential Chinese investors.

A Y 2012 Lowy Institute poll found that 81% of Australians were against the Australian government’s allowing foreign companies to buy Australian farmland.

While Chinese investment in Australia’s agricultural sector has been thoroughly overshadowed by investment from the USA (US$38-M), the UK (US$189-M), Canada (US$104-M) and Switzerland (US$150-M) , China has become a “Lightening Rod” for public anxieties over foreign ownership of Australian land.

Mr. Morgan said that “at first blush” opposition to Chinese investment looks like xenophobia. “But our research suggests Australians are caught between the fear that China will no longer need us and the fear that we do not have a strategy to meet our long-term interests in the relationship,” he said.

According to Mr. Morgan, to continue to enjoy the benefits of the relationship, bi-lateral trade between China and Australia needs time to mature.