Demand for Australian produce from Asia once seemed insatiable. For years inbound investment confidence was high, and it felt like a Chinese delegation was in Australia looking at agricultural assets every other day. Many of these transactions were completing, bringing much needed funding support to pre and post farm gate businesses.
However, recent events such as Murray Goulburn’s post-IPO earnings downgrade, the dairy industry crisis and the Kidman sale saga are very visible examples of the risks inherent in investing in Australian agricultural infrastructure.
With the reduction in capital expenditure in the resources sector, agriculture was identified as one of the five pillars of the economy and a significant contributor to Australia’s future economic growth.
Positioned as a catalyst for change, the Federal Government’s recent white paper did little more than highlight challenges associated with agricultural infrastructure, particularly the significant investment needed to address supply chain issues to cater for increasing demand.
The Government’s $13.8 million funding initiative launched in April to help farming co-operatives, is one example of how they’re working to address these challenges but details are yet to be provided.
Ultimately there is crucial need for private sector participation.
Despite the Federal Government’s shift in focus to agriculture, the industry continues to suffer from a critical lack of investment in assets, stemming from:
- Increasing regulation resulting in increased costs and challenges in getting agricultural product to market
- A lack of available and “investable” capital due to declining returns to farmers coupled with high levels of farm debt
- A lack of scale in the industry which is still heavily influenced by individual small-scale, family-dominated operations
- A lack of strategic planning by farmers, including succession planning
- Loss of farming land due to urban, mining and resource industry development
- A preference for private sector investment to flow into resources-related infrastructure
- A lack of sophistication in pricing risk and charging an access fee
- Difficulties in attracting private sector investment due to varied and disparate ownership structures
Historically agricultural infrastructure was developed in Australia as and where it was needed, by multiple stakeholders, using a variety of ownership and management structures. The legacy of this patchwork approach can be seen in duplication of projects, non-standardisation of systems such as rail gauges and varying transport regulations. Successive governments have tried to leverage privatisation to encourage private sector participation late in an asset’s life, to resolve some of these issues but current structures and arrangements generally remain complex.
Perhaps more evident in the agricultural sector than any other is the concept of the family-controlled farm and the critical role this continues to play in local communities. Succession planning is a major issue. Increasingly, subsequent generations are either unable or unwilling to take on the responsibilities associated with farming. Farms are being sub-divided to share among family members, compromising productivity, competitiveness and profitability in a significant impediment to infrastructure investment.
Where to from here?
In order for agriculture businesses to scale and maximise returns, they need to reassess how their infrastructure assets are held.
In order for agriculture businesses to scale and maximise returns, they need to reassess how their infrastructure assets are held.
More external investors are required and will be attracted by alternative investment structures, including corporatisation of existing co-operatives using unlisted or listed structures, strategic joint ventures and establishing a new company or structure for public listing. Each of these options can facilitate investment and participation by farmers, while enabling the necessary financial support to assist the industry to grow and meet future challenges.
Investment in agricultural infrastructure presents some unique challenges and considerations, including:
- Suitable agricultural assets for alternative investment structures e.g. assets capable of generating an adequate level of return over the medium to long-term
- The right level of support from stakeholders, including a fair and transparent pricing mechanism for use of and access to these infrastructure assets
- An understanding of agricultural volatility and risk over the short, medium and long term
- A deep understanding of the role of equity and debt and the optimal mix in such a transaction
Solutions are desperately needed – more investment, provided in a commercial and relevant way to address the risks inherent in the commodity and the broader economy.
