BDO co-sponsored the recent Agri Investor Australian Forum in Melbourne.
This conference considered some of the most pressing issues for agricultural investors including:
- What’s driving foreign direct investment (FDI) into Australian agriculture?
- How Australia can capitalise on rising Asian demand?
- How the agricultural market will need to evolve in the coming years?
- Understanding the role of agri in an investment portfolio.
Current economic volatility and a downturn in the Australian mining sector have seen interest in the Australian agriculture sector sky rocket.
Despite the tightening of Foreign Investment Review Board (FIRB) requirements, inbound investment continues to flow, due to the low Australian dollar, high product quality, and the perception by foreigners that Australian land is ‘cheap’. The appeal of Australia is also due to the opportunity for investors to have exposure to international markets given we export a significant percentage of our agricultural production; and the security of our legal system.
Regardless of this trend, it is clear that there is a need to attract more investment from managed and superannuation funds. Whilst Australian funds are beginning to invest in Agri, the levels are still low, for example in the 2014/15 year, less than 1% of funds were invested in the sector. (For more information read the BDO report Australian Superannuation Fund Investment in Agriculture 2014/15)
For the Australian region, it is estimated that by the year 2050 there will be a capital shortfall of around $850 billion.
The recent senate inquiry into Foreign Investment Review Framework examined the application of the ‘national interest test’ to purchases of Australian agricultural land by foreign entities.
The Australian Government has chosen not to define what is and isn’t in the national interest. Instead, it determines each application to FIRB on a case by case basis, looking at a range of factors and giving due weight to those factors depending on the nature of the deal and the assets concerned. The lack of transparency around this is a cause for concern and gives rise to inconsistencies which need to be addressed.
One factor holding back larger investors as well as those new to the agricultural space, is the significant proportion of family owned farms that tend to lack the record-keeping, financial data and governance rigour required by potential investors.
This issue is compounded by the fact that most farmers are 12 years older than the national working average and in some cases have no formal succession plans in place to manage their operations going forward.
It was noted that the attitude towards book keeping, accounts and finances amongst producers is starting to change, with some recognising the value of having their business affairs in order so as to be more attractive to investors.
Another factor limiting the flow of funding into the sector is the requirement for increased consultation along the supply chain.
In particular, producers need to be aware of the demands of the market and end-users they are supplying to. This knowledge provides producers with the opportunity to fine tune their offering (for example GM considerations or organic produce) to match changing consumer preferences and in turn achieve better profit margins, thus gaining the attention of large investors.
In general the beef and lamb markets are currently considered attractive options, with interest in the wool markets falling off due to decreased demand, husbandry issues, limited markets and the abundance of alternate materials (synthetics and the like).
There is good demand for investment in the ownership of Australia’s water resources due to the limited water supply in Australia, the critical impact that water (or the lack of it) has on our agricultural sector, and there being a developed market with an appropriate legal and regulatory framework.
There are many factors impacting investment in Australian agribusiness, with an overarching need to manage risks around commodity and price fluctuations in order to provide some level of surety around the investment made by Australian funds into this sector.
The long term outlook for the sector remains strong with opportunities available for all involved.