The just-concluded Australian Farm Institute’s “Funding Agriculture’s Future” conference held in Canberra provided some fascinating insights into the reality of investment in Australian agriculture – leading to the conclusion that while there is significant (offshore) interest in investing in the sector, the family farm structure is more than competitive with most available alternatives.
The conference brought together bankers, investors, farmers, financial sector advisors, farm consultants and agricultural economists to discuss the whether the agriculture sector will be able to attract sufficient future capital in order to be able to respond to burgeoning Asian food demand. The overall conclusion seemed to be that the sector will be able to attract sufficient capital in the future, but it is likely there will be a more diverse array of business structures operating farms than the predominant current model of families owning and operating farms, funded by debt.
Farm benchmarking and survey data presented at the conference highlighted that the debt levels in the sector grew rapidly over the period from 2000 to 2010, – with much of the debt used to fund farm consolidation – but debt levels have declined in the past two years. Interestingly, the data indicates that most of the growth in debt was attributed to 10% of the largest farms, and that it is these farms that are accounting for most of the increased output and productivity growth in the sector over recent years. These farms are also generally fairly profitable, with benchmarking data revealing that the top 25% of farms have returned an average 8% return on capital annually over the past decade, and many of these have achieved considerably higher rates of return.
The performance of corporate farming businesses was the subject of a lot of discussion amongst conference attendees. Data presented by one speaker indicated that, in general, the corporate model has not been a great success. Part of the reason for this was evident from the farm benchmarking data, which revealed that management skill is a key success factor, and is part of the reason why the family farm model has been, and continues to be successful. Irrespective of location, rainfall or enterprise, the best farm managers manage to consistently avoid losses in bad years, and generate significantly better returns in good years. The reason seems to be that these managers are marginally better in most of the things they do. They spend slightly less per hectare or tonne, obtain slightly higher yields or turnoff numbers, and secure marginally higher prices than their peers. When all these ‘small’ differences are added together, the result is substantially better profitability.
Corporate farming models have higher administrative overheads, and are less nimble in their decision-making. There is also a view that corporate management tends to lack the higher level of motivation that the best family farm manager have as a consequence of having ‘skin in the game’. There was also quite a deal of comment about the fee structure of some corporate farming models.
Interestingly, data presented to the conference for Australian superannuation funds revealed that retail fund managers have achieved an average of about 4% annual investment returns over the past 15 years, and industry superannuation funds an average of 5.6% annual returns, a worse result than many farm businesses. No wonder there has been a substantial shift to self-managed superannuation funds!
The lack of interest in agriculture by Australian superannuation fund managers is, in part, put down to the lack of liquidity of farm investment structures, and also to the prudential requirements imposed on superannuation fund managers which limits their ability to invest in unlisted structures. As a number of speakers noted, agriculture investments typically operate best on long timescales – 10 to 20 years – not the much shorter timescales over which listed businesses are required to demonstrate performance, and which most superannuation fund managers also operate on.
In contrast to the lack of interest in Australian agriculture by domestic investment fund managers, the conference was told that there is strong and growing overseas investor interest in Australian agriculture. Investors range from those seeking to move their money to a safe location like Australia, to ‘trophy investors’ who are interested in a showcase property, to ‘trade investors’ who are participants in some part of a supply chain and want to gain more control or a better understanding of the Australian end of the supply chain.
Discussion about different farm business structures focused on models which involve separation of the ownership of farm real estate from the operation of the farm business. The high level of risk in Australian agriculture compared to risk levels in agriculture in overseas locations was recognised as a reason that there is less separation of ownership and operation in Australian farm business structures. That said, most speakers expect such models will become more common, and provide a way to utilise the critical resource – management skill – over a larger number of hectares or animals. Viable risk management instruments, such as multi-peril insurance, are considered to be a critical ingredient in the further development of different farm business structures in the future.
One conclusion – family farm businesses will be the predominant business structure in Australian agriculture in the future, but there will be a greater diversity of business structures which provide opportunities for equity to be held by a wider range of investors than is the case at present.