BDO attended the 2018 Agri Investor Forum in Melbourne for the third year in a row and joined agribusiness leaders, investors, regulators and advisors from around Australia to discuss the factors driving interest in Australian agriculture investment and have summarised the insights from the key sessions.
The 2018 Agri Investor Australia Forum (Forum) in Melbourne on 20 June 2018 brought together more than 200 agribusiness leaders, investors, regulators and advisors from around Australia, including Tax Partners at BDO, to discuss the factors driving interest in Australian agriculture investment. Last year’s Forum examined the issues holding superannuation funds back from investing in agribusiness, including perceptions about risk, low returns for agribusiness investment, short term investment horizons, low liquidity of investment and lack of investment managers with in-house agribusiness expertise. This year the focus moved to identifying solutions for overcoming these issues.
Treasury and financial risk management for agricultural business
Agribusiness has some unique risks and if Australia’s agribusiness sector is to remain sustainable, risk management must come to the forefront of the agricultural investment debate—particularly in dealing with investment risk, to improve access to investment and asset acquisition opportunities that would support rural communities and boost the sector’s growth in domestic and international markets. The Forum opened with an analysis of the shortcomings of the current risk model, the collective vehicle for industry fund model, which does not result in direct investment in farms. AgCAP, a funds management business specialising in investment in Australian agriculture, also highlighted the lack of desire to understand the agribusiness sector at the board room level resulting in a difficulty in obtaining investment in agribusiness.
What’s holding back super funds from agribusiness investment?
One of the issues identified in last year’s Agri Investor Australia Forum was the lack of comparable data between agribusiness investment relative to the equities market, as data on agricultural assets is important in assisting fund managers and pension funds understand that agricultural assets are real and not alternative assets. In the last 12 months the Australian Farm Index, championed by former Warakirri Agriculture Trust and Sustainable Agriculture Fund manager Frank Delahunty and styled on the US Index the ‘National Council of Real Estate Investment Fiduciaries’, has gained more traction and now includes nearly 7200 properties in Australia valued at A$680 billion including 705 farms valued at A$10.2 billion with asset managers representing pension funds, real estate investment trusts and institutional investors, and reveals that Australian farms returned 16-18% in the last 12 months.
Agriculture’s role in a diversified portfolio
Whilst the majority of non-agricultural assets may exhibit volatile and fluctuating values, agribusinesses are often either stable or moving in the opposite direction. This negative correlation means they're an asset class of special value requiring consideration for portfolio attention, and reinforces their status as a point of diversification. Institutional investors look at risk adjusted returns, the commodity cycle, liquidity etc. and consider investments including credit lending, commodity trading and inventory finance. As compared to investing in real estate and the stock market, over the long term, agribusiness provides a comparable return as an asset class, although income is lower compared to equity assets. Corporate Social Responsibility (CSR) issues such as carbon pricing, animal welfare etc. are important along with aligning performance on CSR (as well as financial) outcomes with remuneration along with managing reputational risk which requires due diligence and responsible investment. So how do agribusinesses achieve diversification in portfolios, what type of diversification is required and is it the most important consideration?
Managing Agri Risk
Geographic and commodity diversification is the traditional means of diversifying but only by larger entities. Diversification can also sometimes result in lower returns so adopting strategies that result in long term returns based on operational capacity and human capital is also important. The issue of regulation and preparing for and measuring risk is also vital. Weather, markets and policy are the three biggest risks and of the three, policy is the most unpredictable, highlighting a need for industry to be involved in consultation. Government policy is not always rational e.g. recent changes to FIRB have been viewed as egalitarian and changes to MIT rules have not been kind to foreign investors.
The Agricultural landscape in 2030
Climate change, biosecurity, technology and an ageing population will all be issues of the future and farmers will be expected to be ecofriendly rather than relying on the Government to implement environmentally conscious measures. In the future farmers will also move from ‘looking at the clouds’ to ‘operating in the cloud’ as data transforms the value chain and technology is used to facilitate systems progress e.g. protected cropping technology with glasshouses. Consumers are evolving too, demanding: convenience for both in- and out-of-home consumption; a broader range of flavours and food based experiences; customised offerings; more information about how and where their purchase originated; and products that improve mental and physical wellbeing. The CSIRO’s Food and Agribusiness Roadmap, last updated in 27 October 2017, is the fourth in a series of five roadmaps, each aligned to the Federal Government's Industry Growth Centres and focusses on unlocking value‑adding growth opportunities for Australia.
Sustainable agricultural investment and impact related investments
‘Sustainable agricultural investment’ is an approach intentionally seeking to create financial returns alongside positive environment and social impact. Northern Australia has a great opportunity to forge a sustainable economic future in agriculture but the key is in broadening its commodity specialisation, maximising land tenure arrangements, and investing in research and technology to attract much needed capital investment. The Food & Agriculture Organisation of the United Nations ‘Major Drivers of Change in the 21st century’ report released on 11 February 2017 presents trends and challenges of sustainable agricultural investment, but more have been identified since then including the rise of millennial and Asian consumers.
Agtech: Doing more with more
The agtech investment landscape has grown over the last decade, from a niche, opportunistic venture capital investment class, to a legitimate asset class attracting focused and generalist funds with dedicated agtech investment allocations and was a theme explored at the Forum by many presenters. Technology is disrupting agribusiness with block chain being used to identify where things have gone wrong in the supply of product, farm robotics and artificial intelligence harnessed to achieve precision agriculture and a reduction in use of inputs such as chemicals and automation reducing labour costs and shortages and driving high-value ag producers to seek solutions to harvesting, weeding and crop protection. Despite the benefits of utilising technology in farming operations, Agtec companies are still finding it difficult to convince farmers to invest in it signalling a need for a cultural change.
BDO has a genuine commitment to the agricultural industry and our Agribusiness experts regularly attend industry briefings, contribute thought leadership to the industry and actively support industry stakeholders. Members of our Sector Group attend industry conferences such as Global AgInvest New York, Global AgInvest Singapore, Australian Farm Institute, Rabobank’s F20, Australian Agribusiness Association, Rural Press Club and The Australian Global Food Forum. On 22 June 2018 BDO lodged a submission
in response to the House Standing Committee on Agriculture and Water Reforms Inquiry into Superannuation Fund Investment in Agriculture, which called for recommendations on regulatory requirements and other issues that are acting as a barrier to superannuation fund investment in Australian agriculture, which contains ideas that may incentivise superannuation fund investment in agribusiness. BDO utilises its combined agribusiness and tax expertise to assist both Australian and foreign investors with making an informed decision about prospective purchases, evaluating funding structures to manage risk and optimise returns and to work through the tax implications of purchasing a farming operation.
Agribusiness Investor Forum 2018