OPINION | The superannuation industry has typically shied away from investing in farms and other agricultural assets. However, as demand from Asia for farmland booms, it’s time to work to overcome the hurdles to local investment in bush communities.
With the right mix of investment strategy and management expertise, Australian farming can deliver local asset owners stable long-term income, along with the diversification and inflation hedging benefits typically associated with agricultural commodities.
Australian-based managed funds such as Laguna Bay, Macquarie Infrastructure and Real Assets (MIRA), Warakirri Agricultural Trusts and Queensland Investment Corporation have already invested, or committed, more than $2.3 billion dollars to local agriculture. Meanwhile, international players, notably a handful of major Canadian pension funds and the US Teachers Insurance and Annuity Association, have invested more than $1 billion in Australian agricultural assets since 2007-08.
A sharp rise in foreign investment in domestic farmland since the global financial crisis is hardly surprising. Buyers are seeking to secure prime land and assets in readiness for surging overseas demand. Whilst these investments represent a vote of confidence in the local industry, many asset owners remain inhibited about adding agriculture to their portfolio mix, given several high-profile failures in the past.
For those in the know
One prominent concern is the view that the low-return, low-volatility characteristics of agriculture make the asset class less competitive than other investments with a similar risk-return profile.Secondly, because of the generally fragmented nature of agricultural industries and the lack of broad, standardised performance data, investors must have in-depth sectoral knowledge and experience before committing to it. Finally, Australian climatic conditions – tougher and less predictable than in North America – can affect farm outputs.
To identify the performance of shortlisted assets relative to sector averages, extensive research and benchmarking is required. However, with research and due diligence, decent returns from agriculture are possible for institutional investors.
Opportunities aside, investors must always keep in mind that agriculture investment is a long-term game and should be approached judiciously, with consideration to how it fits within the overall portfolio. Investors must also consider whether they have the necessary expertise in assessing agricultural investment and under what model (direct operation, leasing, joint venture or partnership) a farm asset should be operated. Within the agricultural sector, property, water, timber and infrastructure assets all offer different risk-return characteristics that require different expertise to manage.
Scale is another important factor. Since the availability of large-scale farms is limited, investors may need to consider aggregating smaller farms to achieve similar benefits.
Investing in the bush
Agricultural production is an essential part of the food supply chain with tremendous potential for vertical integration and automation. Going forward, smart technologies can only enhance its efficiency and global competitiveness.
The local sector must position itself to supply high-quality products to the burgeoning Asian middle class where the demand for protein and ‘clean-and-green’ produce will rise. Our proximity to Asia and the recently signed free trade agreement with China should mean greater opportunity and access for Australian exports.
The wider impact on rural communities of agricultural investment cannot be overstated. A rural post code is too often an indicator of social disadvantage. In addition to providing a diversified source of returns, greater institutional investment in Australian agriculture could also help provide jobs and build sustainable, healthy bush communities.
Here are some steps for boosting super funds’ investment in the bush:
- Establish an independent survey of farm performance to measure rates of return across crop and livestock producers
- Undertake an infrastructure audit of each of the major commodity supply chains to ensure the adequacy and competitive operation of transport, processing and storage facilities across regions.
- Establish Australian Competition and Consumer Commission regulatory arrangements to achieve effective price discovery and transparency in wholesale agricultural markets to neutralise the impact of big supermarket and international subsidies.
- Develop industry and trade policies to encourage domestic operators to form consortiums with local and foreign processors and distribution networks to reduce agricultural sales risk.
- Require the Commonwealth Treasury to take a more strategic approach to foreign investment rules.
- Establish a regional development bank to provide advisory services to rural producers and arrange long-term finance to intensify operations more efficiently.