Improve The Process Of Capital Flows Into Agriculture
The past decade saw the biggest change in the structure of inbound international investment into Australian agriculture in the industry’s history.
Foreign Direct Investment (FDI) has long been a vital component of the sector and rapid growth in exports combined with expectations for increases in long term demand saw even stronger investment growth.
Whilst the topic has been a controversial one, an ongoing rise in investment is vital for the industry to lift production levels and meet the demand required by major trading partners – all the while doing this in an increasingly efficient way. If new sustainability practices are to be achieved in ways that both benefit the country ecologically and continue to allow the agriculture sector to prosper, the requirement for ongoing investment flows to facilitate the change in farming practices will be more important than ever.
While the high quality of Australian agriculture production assets and the food demand outlook are two major drivers of increased investment into the sector, it is the structure of the investment landscape itself which plays an equally major role.
The past two decades have seen the rapid growth in the scale of some of the world’s largest investment funds – particularly those from North America and Europe. These funds include endowment, pension and sovereign wealth funds.
Growth is driven by factors including consolidation of funds, regulatory changes lifting the levels of income allocated to pension funds to reduce long term government liabilities, and through long term investment strategies.
Over the past decade, an increasing number of international investment funds have begun to invest in agriculture, either on their own, through a ‘fund of funds’, or a funds management structure.
As these offshore investors increased their presence in Australia, the impetus was created for Australian investment funds to follow suit. While the relative lack of investment in agriculture by domestic funds has created debate, most Australian funds have not had the scale necessary to allocate a large enough percentage of their investments to production agriculture. In comparison to more traditional asset classes, it is difficult to ensure that the size of their investment would not overexpose them to the comparatively high risk of agricultural investments.
The focus of investment will continue to grow across the entire food supply chain. This will be as a result of the economic growth forecast until at least 2025 – albeit with some turbulence, particularly due to the geopolitical landscape, as well the ongoing domestic and export demand stories.
While the investment landscape for production agriculture has been enhanced over the past decade, there are a number of steps that could improve the process, for the benefit of all stakeholders.
One area requiring ongoing consideration is the outlook for long-term liquidity in the market. This issue will become increasingly relevant as a number of agriculture funds approach the end of their investment horizon over the current decade. There will be great interest in determining whether new funds or investors will be readily available to take the place of those exiting. Over the past decade, despite the impact of droughts on the commodity returns of some of the major Australian agriculture fund investments, investors have been comforted by strong levels of capital appreciation.
If farm capital appreciation declines, or if global market returns were to consistently be above farm capital appreciation and yields, then corporate investment in farming could again come under scrutiny. However, the combination of global factors pushing the long-term demand behind food production, combined with the shift of agricultural investment from an alternative asset class to an established one, is unlikely to see any major drop in corporate investment focus.
The strong growth in Foreign Direct Investment has coincided with rapid growth in exports.
Over the coming decade, it is inevitable that a number of Australian super funds are likely to merge. This will allow them to take advantage of administrative efficiencies of scale, in what is a fragmented and competitive market. As more Australian super funds grow in scale far larger than their current size, they will have the ability to not only pursue investments in agriculture more aggressively, but also to acquire far larger assets.
It is important for the industry to best position itself to take advantage of a likely pending growth in domestic appetite.
Many farmers – particularly the larger scale and recognised innovators – are enthusiastic at the prospect of exploring new funding opportunities from both global and domestic funds. Many want to make the necessary connections and build networks but don’t always know where to start. They are keen to learn how best to market the investment opportunities in their operations, including their operational data, long term strategic plans, and sustainability practices.
While all good farmers will have these materials and abilities to a certain level, these skills need to be formalised to a greater degree across the wider farming population. A major part of this will be educating farmers on the metrics required by investors, as well as any new sustainability characteristics an operation should adopt to become an attractive investment proposition.
While investment in Australian agriculture has grown strongly over the past decade, the strength and sophistication of global competitors continues to raise the bar. Australia has an excellent setup of international offices and representatives promoting agriculture as an investment, particularly Austrade.
Global investors will increasingly require a highly sophisticated and specific campaign to guarantee that Australian agriculture stays at the forefront of attention for the global investment dollar. It will be important for government, agriculture industry bodies and the private sector to work together more closely to enhance the investment campaign globally. One option could include appointing experienced agriculture investment specialists to promote opportunities globally.
Farmers will require education on the metrics usually required by investors, as well as any new sustainability characteristics an operation should adopt to become an attractive investment proposition.
Large scale investments in prime Australian agricultural assets are currently supported by a small number of real estate and legal firms. While it is important that the highest level of expertise is provided to facilitate these transactions, many medium-to-smaller sized firms with agriculture expertise – particularly in regional Australia – could build out their networks and skill sets to better tap into these opportunities.
A campaign to provide regional real estate agents, legal firms and accountants with learning in how to identify and access greater levels of investment could provide them with the opportunity to participate more fully in any investment flow, with ongoing benefits for regional communities.
Critical to fund investment is operational expertise – whether taking on direct management, or leasing. In all areas, this market has to keep pace, or the investment will slow.
