10 September, 2010

Australian Agriculture

I recently wrote a paper on investment in Australian agriculture. This what I wrote:-

"Australian Agriculture Investment
Background

  • ·         To the nations considerable advantage farming and grazing production of Australia’s major bulk commodities is dominated by family farmers.
  • ·         These family farmers bid the price of land to levels where returns on funds invested are very low. In these circumstances it is extremely difficult for conventionally funded, publically listed companies to compete.
  • ·         An important element of ‘wealth creation’ comes in the form of capital gain on land and more recently water licenses.
  • ·         As the best land is tightly held, successful operators seldom realise the capital gains in cash terms, but they are nevertheless “real”.
  • ·         A key feature of Australia’s climate is massive rainfall variability.
  • ·         The major commodities most suited to Australia’s production base are dependent on very price volatile international markets.
  • ·         This volatility largely stems from supply side factors, particularly weather.
  • ·         There has recently been significant international recognition of the probability of demand increases for food and some large international players have been positioning themselves accordingly. However, there is little evidence of Australian institutions so acting.
  • ·         Given all these features of the industry, if significant capital is to be raised it needs to come from “institutions” who have a long term focus from a wealth creation perspective and are able to withstand rainfall and price volatility.
  • ·         This price and rainfall volatility can be cushioned by a commodity and geographical spread and the judicious use of pricing mechanisms-derivatives and forward physical sales.
Sources of Capital

  • ·         Recent investment in Australian agriculture has come largely from overseas sources-Macquarie Fund, Terra Firma, Eastern Australian Agriculture, etc. An exception has been the recent WA super fund Westscheme investment in RM Williams Agricultural Holdings.
  • ·          From a narrow nationalism point of view it would seem unfortunate if something as quintessentially Australian as broad acre agriculture was not seen as an area for investment by our local institutions.
  • ·         A significant proportion of Australian savings are now in superannuation funds. These funds have very little exposure to Australian Agriculture.
  • ·         These type of investment vehicle funds are better able to take a long term earnings perspective and accept ‘wealth creation’ in the form of unrealised capital gains. The AMP’s long term investment in Stanbroke Pastoral Company is a good example of the returns to be earned.
Management

  • ·         A serious deterrent to institutional investment in Australian Agriculture has been concern with securing competent management.
  • ·         The industry’s appeal as an investment area has been tarnished by “too-clever-by-half” tax driven ventures often proposed by entrepreneurs of dubious repute.
  • ·         Thus, it would seem that any investment proposals chances of success would be enhanced if assets and management (including a prospective C.E.O., Chairman and independent Directors) could be “packaged” with an investment offering."








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