Will agriculture attract suitable future capital?

Does Australian agriculture risk missing out on the opportunities created by rising food demand in Asia because of current funding models?

The funding models available to Australian farmers and agribusinesses have remained largely the same for the last 100 years. Essentially, farmers use their accumulated capital (principally land) as security to obtain finance from banks to meet the funding requirements of their businesses. Reliance on this traditional funding model may no longer be adequate, however, given the increasing capital demands of the sector, and the changing financial sector regulatory environment in Australia in the wake of the global financial crisis.

The Australian Farm Institute (AFI) is undertaking a research project which involves reviewing the capital funding options and business structures utilised in the Australian farm sector, with the aim of determining whether there are areas for improvement and recommending any changes that may be needed. The research project will also include case study analysis of capital funding options and business structures in the agricultural sectors of New Zealand, the United States and Argentina.

Participants in the agricultural sector generally make capital investment decisions which have a 10 to 15 year time horizon, and which entail risk factors that are considerably greater and different to those experienced by businesses in other sectors of the economy. Major risk factors include the weather and international commodity prices, and there are limits on the extent to which these risks can be insured against. These factors generally make the agricultural sector a difficult investment environment, which necessitates what has been referred to as ‘flexible and patient capital’.

A review of the funding requirements for capital items such as fixed assets including land, equipment and infrastructure and working capital items such as energy, seed stocks and agrichemicals will be an important part of this project. Examples of the types of funding options that will be reviewed in this project include; cash-flow management, bank lending, equity funding, cooperative services, venture capital, commodity trade and finance, risk management solutions, supply chain contracts, leasing, hire purchasing, chattel mortgages, share farming and government initiatives. Examples of the types of business structures that will be reviewed in this project include; sole traders, partnerships, companies and trusts.

The initial review will collate information on capital items, funding options and types of business structures so that financial strategies can be matched with the likely requirements of the sector in the future. The performance measures of these financial strategies will then be reviewed, including risk return on equity for different capital investments and the range of equity ratios for managing different capital items.

The research project will also review information on other limitations to obtaining capital funding, such as industry deregulation and increasing competition in the international marketplace. The adequacy of the funding options and business structures available to the Australian agricultural sector to support capital investment under these market conditions will then be evaluated.

The AFI mid-year conference entitled ‘Funding Agriculture's Future’ will also provide valuable support to this research project (see details below).

Ultimately, it is anticipated that the research will be completed in late 2014.

Australian agriculture is at an exciting point in its history, with the potential for rapid expansion, driven by the emergence of middle-class Asian food consumers with a taste for safe, high quality food. However, realising this potential will require significant capital investment to lift farm productivity, and also to overcome ageing public infrastructure and a post-farm food processing sector that has experienced an extended period of underinvestment.

The Australian Farm Institute’s ‘Funding Agriculture’s Future’ conference aims to bring together experts from the agriculture sector both in Australia and internationally to discuss the future investment needs of the sector, and to consider potential models that may be available to achieve the required investment and growth.

Back to May 2014 Insights contents page.

Images:  Martin Howard, Deniliquin Newspapers, USDA