Agriculture has seen mixed status as an investment from super funds, so what qualities are super fund investors looking for in this sector?
Superannuation funds represent some of the largest investors in the Australian economy and are designed to provide long-term financial security for their members, with portfolios that span almost every sector.
However, agriculture has not been a major area of investment for these funds, despite the potential that agriculture might play a role in a super fund's investment profile. According to research from BDO and the University of Queensland Business School, only 0.3 per cent of the country's MySuper investments are held in the agricultural sector.
History suggests Australian agriculture is an attractive long-term investment and the favourable outlook for the industry suggests it will be in the future especially giving our proximity to the rising middle class of Asia and a low interest rate environment. Farming and related industries remain some of Australia's most valuable - the National Farmer's Federation estimates that agriculture accounts for 12 per cent of the country's GDP.
With such diverse opportunities across the sector, the question remains: are super funds choosing to invest in the agricultural sector? And if so, what are they looking for in these opportunities? BDO's interview with Prime Super has revealed a few core areas: return on investment, risk profile and diversification.
Proving consistent profitability
While superannuation is certainly a long-term investment, Australian super funds still have to maintain short-term profitability and provide annual results. This inevitably influences the sort of agricultural enterprises that a fund is willing to invest in.
Likewise, the return on investment has to be considerable before an Australian superannuation fund pursues a certain investment. The industry calls for annual returns of around the 10 per cent, while overseas superannuation funds may be happy with a much lower return.
Managing risk across the industry
As with any investment a super fund makes, offsetting potential risk is going to be front and centre in any decision. For the agricultural sector, this poses a significant challenge, with the industry facing varying yields and unstable returns.
These risks also make it harder for agricultural operators to attract investment in general, but especially from superannuation funds that rely on a steady revenue stream. From an investor's perspective, there are a considerable number of risks associated with agricultural operations, from weather to global commodity fluctuations.
Super funds will usually prefer hands-off investment opportunities rather than those that require a role in the operational side of the business. Unlike other property investments, agriculture calls for a hands-on management structure.
For example, commercial offices require very little ongoing maintenance. A farm, on the other hand, requires a dedicated management team on site to oversee the day-to-day running of the property. This can also create conflict between the investor - in this case a super fund that has targets to make - and the individuals on the ground overseeing a property.
The importance of diversification
Finally, areas that are attractive for investment in the agricultural sector will be those that are diversified and have a broad range of different offerings.
This diversity can take a number of forms. It could be that a company operates across a wide number of regions, for example. This means they won't be as affected by specific weather events like drought or flooding that might affect a company that is highly concentrated in one area.
Likewise, operators could have a highly diversified product range, providing agricultural goods that offset the risks that accompany this sector.
Both of these factors underpin one of the core weaknesses of the Australian agricultural sector as a whole - the inherently small scale of these operations. With relatively few agriculture firms having the size to list publicly, superannuation funds and similar investors are left with investing directly in the sector. In fact, BDO's research found that only 0.44 per cent of listed companies on the ASX 200 are agriculture entities.
Agricultural companies that can achieve the size and geographic and/or commodity diversity to offset these risks are also going to be the most attractive investments for superannuation funds in the coming years.
Finding areas to add value
Beyond the direct production of agricultural goods, there are many areas where there is considerable potential for investment. Much of the infrastructure and facilities needed to support the agricultural sector are areas where there is considerable potential for super funds to invest in. This could be ports, rail or road infrastructure needed to move agricultural goods, or the facilities needed to handle and process these products.
All of this supporting infrastructure doesn't develop through super funds alone though, nor will it come from companies already active in the agricultural sector. Instead, it will need to combine input from federal and state governments with investment from super funds and consultation with regional groups.
The Australian he agricultural sector will continue to present an opportunity and a risk for superannuation funds. Those companies that effectively navigate this landscape and find the areas within the sector that are demonstrating solid ROI will be the ones that can make the most of this $150 billion-a-year industry.