Ag needs capital, not debt

13 Mar, 2015 01:00 AM
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10
 
ABARES executive director Karen Schneider.
Essentially we think Australian agriculture's going to be a good investment bet
ABARES executive director Karen Schneider.

THE traditional bank loan is no longer enough to fund agricultural growth in Australia, particularly when other sources of capital are keen to get an investment foothold in the promising sector.

Head of the nation's farm industry forecasting body Karen Schneider has weighed into the debate about whether Australian agriculture has the funding capacity to take advantage of ballooning export and value-adding opportunities.

Agriculture needed to better tap into the global investor capital market, she said.

First, however farmers and agribusinesses had to prove farming was a worthwhile investment, delivering returns comparable with other industry segments.

Commercial scale farm businesses could be good investments compared to other uses of investment capital, she believed, although beef production was currently struggling to make the grade.

Addressing last week's Outlook 2015 conference Ms Schneider said many believed a major transformation of the farm sector was urgently required and new financing structures and sources of capital were needed to make that happen.

The executive director of the Australian Bureau of Agricultural Resources, Economics and Sciences (ABARES) said doubts abounded about whether current local lending arrangements had the capacity to drive the sort of investment required to swiftly ramp up rural productivity and deal with the challenges of supplying food markets.

While agriculture had been traditionally and successfully financed by debt for generations, Ms Schneider said other sources of capital were now increasingly interested in agriculture worldwide, including institutional investors.

Australian bank-funded farm debt shot up about 75 per cent to about $70 billion during the past decade, but has plateaued as lenders tightened finance availability after the global financial crisis and farmers have grown reluctant to borrow more.

Although farm debt-to-equity ratios were "quite strong" and interest rates unusually cheap, Ms Schneider said too much debt remained a problematic issue in some regions, particularly in drought areas.

Debt levels grew about 5pc last year in areas hit hard by several years of drought, primarily covering cashflow shortfalls.

She said to meet food demand and to achieve a much-needed productivity boost and farm consolidation a lot of new on-farm investment was needed to expand our enterprise scale.

Big funding injections were also required off-farm to provide technology support and infrastructure, particularly transport.

ABARES research indicated commercial-scale farm businesses could achieve returns in line with investment earnings with equivalent risk from other asset classes, including term deposit savings and shares in top 200 companies on the Australian Securities Exchange (ASX).

"Cropping and vegetables offer the highest rates of return and dairy sits on a similar line to returns available from alternative investments, based on the risk involved," Ms Schneider said.

"The beef sector falls under the line - reflecting the highly variable seasons and market conditions of the past decade and major land valuation declines in northern Australia.

"Essentially we think Australian agriculture's going to be a good investment bet.

"In a general sense commercial-scale returns are commensurate with the risk profile of other alternatives and Australian farms can be a good strategy for those investment funds around the world looking to diversify portfolios and to maximise returns."

Ms Schneider reiterated Agriculture Minister Barnaby Joyce's comments at Outlook about Australia being a "very open market" for foreign investment and had always imported capital.

However, she said New Zealand probably had a more diverse investment structure within its agriculture sector.

Addressing risk issues associated with ag investment, former National Australia Bank agribusiness head Mike Carroll noted too much debt "almost always played a role" in sudden farm enterprise collapses, particularly if big decisions went wrong.

Intensive agriculture accounted for a relatively high share of those failures.

Other factors contributing spectacular collapses included poor investment judgement, bad timing and the sort of irrational exuberance about the market's prospects which occurred with last decade's run on northern beef properties.

Many assumed commodity price slumps and tough climatic conditions caused farm failures, but in his experience they were usually a second order factor.

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FarmOnline
Andrew Marshall

Andrew Marshall

is the national agribusiness writer for Fairfax Agricultural Media
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READER COMMENTS

Qlander
13/03/2015 4:59:07 AM

There are currently 500,000 self managed super funds with an av value of $500,000 in Australia. The top yielding companies in the world pay a dividend of around 4%, for most it's less than 3%. Instead of going to a bank go to an investment adviser and ask if they have any SMSF's that want to invest. A PTY LTD company can have 50 shareholders. On one hand you give up the capital gain on those shares, on the other dividend is paid on profit (after your salary) A share holder can only sell their share to an other investor, they can't force the sale of the whole property.
Jock Munro
13/03/2015 5:11:12 AM

It looks as if ABARE wants us to flog off our farms to the highest foreign bidder as well. Group think is alive and well in Canberra. Perhaps ABARE could relocate to China or the Middle East! .
angry australian
13/03/2015 5:54:47 AM

If this is the best "advice" ABARES can give Barnaby should shut it down and retrench Ms. Schneiders and her team.The money saved would be better used funding bush hospitals or roads! All our primary industries need capital urgently.Who,apart from sovereign wealth funds, would invest here.There will be no inflow of capital until investors are sure they will achieve a reasonable rate of return. If Australian farmers, who are notorious for underpaying themselves can't achieve consistent returns who else can?Instead of looking at the impediments to profitability ABARES give us this rubbish.
Rearview
13/03/2015 6:05:45 AM

Spot on Mr Carroll
FamilyFarmer
13/03/2015 6:37:57 AM

In our experience the interest in agriculture as an investment option has not translated into investment into family farms. The boys with the big $ want to buy large properties and run them themselves. 2 years of promoting the family farming model to the investment world has delivered nothing that could replace traditional debt and this is from a family farm with an MBA at the helm. There is a fundamental flaw in the approach due to investors relying solely on number crunchers who have no hands-on experience within family farming systems and therefore miss the competitive advantages.
Farm-Edge
13/03/2015 10:30:40 AM

I think it is good to have the conversation. Investors may need education on agriculture just like family farms need education on seeking investment and working with shareholders / investors. In addition, let's start legalising equity based crowd funding so agri-business can approach the broad market on a cost effective basis. Also, working with investors does not mean selling the family farm, it is raising investment into a business of which the land is one component.
Archibald
13/03/2015 12:16:58 PM

Seems to me farming no longer has the returns to support a loan. This is a government problem, caused by poor policy supporting of the big boys up the food chain to the detriment of farming in general. Only cashed up overseas "investors" whom might be able to avoid the regulation and ever increasing costs might survive in the short term, in the long term if there is no change in government policy, farming is in for rough trot in deed.
x
15/03/2015 6:39:10 PM

Capital or debt, basically the same as those with capital want a return and debt has to be serviced. What about overall profitability for Ag in Aus. ABARES is a joke
Qlander
16/03/2015 5:47:53 AM

Most family farms are looking for less than $2 million. This is too small for the institutions, but too big for just 1 or 2 SMSF. You need to be looking at about 2500 shares spread across 10 or 20 SMSF. Getting a $500k SMSF to invest $50k in Ag is not a big ask. Attracting and managing investment will become a vial skill in farming, the benefits are enormous. Just the ability to access, and even trade in, capital gain has huge advantages. Bank greed has pretty much priced them out of the market.
Bushie Bill
16/03/2015 8:05:05 PM

You really are in dreamland, Qman, with such immature and infantile investment management ideas. And here I was thinking you were one of the smarter flybotherers! What mug would enter any investment in the way you are prescribing? No one with an IQ higher than his boot size. However, there are some retiring agsocs with a lot of money, aren't there? Hmm...

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