Agribusiness blooming in dry investment climate

Horror tales about investors losing their money on agribusiness schemes have clouded the fact some projects are offering healthy returns to their investors.

These projects have mainly been vineyard schemes, although some olive projects and fruit are also fulfilling promises.

Projects that were based on specialist markets such as almonds are also paying returns, as are some traditional crops such as cotton and grain.

It was the early, tax-driven schemes, where the only ‘harvest’ was reduced tax payments, that gave the sector a bad name among financial planners and investors.

A lot has changed in the sector since then, with project managers now having expertise in what they are growing and promoters looking at the financial viability of the crop.

One successful agribusiness promoter has beenRural Funds Management(RFM), which has launched grape and cotton investment schemes.

RFM executive director Andrea Lemmon says the key to gaining positive returns from the company’s managed investment schemes has been the quality of farm management.

“You need good farm management and good cost control,” she says.

“The other important issue is looking after the sale of the produce from the scheme.”

RFM’s Agriculture Investment Trust produces cotton in New South Wales and grapes in the Barossa Valley and Adelaide Hills.

Contracts have been secured for the grape harvests and cotton is sold through traditional sources to deliver returns for investors (see Table 1).

While contracts for the sale of the produce are very important, another factor is selling in a profitable market.

Demand for grapes depends on the variety and the region in which they are grown. The demand for Australian wine has therefore kept the prices firm.

Other crops can be affected by global demand, climatic changes and natural disasters.

According to the National Bank Agribusiness survey, the outlook for some crops did not look bright for 2003.

The survey found business confidence for the cotton sector was a negative 44 per cent, while wine was up only five per cent. The timber industry was not reviewed.

The National’s chief economist, Alan Oster, says the fall in business confidence was due to reduced profitability, a combination of weak domestic and external sales and lower margins.

For managed investment scheme producers, there will be increased importance on controlling all the risk factors that could impact on profitability, Lemmon says.

“We control risk with a due diligence process at each property and that is particularly important with water management,” she says.

“In this drought we have only reduced cotton production by a third, due to the ability to obtain a reliable water supply.”

While crop reductions impact on returns, clever management of water supplies — fast becoming a major factor in the viability of a scheme — can keep downturns to a minimum.

Lemmon also admits that as the company gains experience in managing these crops, this brings benefits that translate into the bottom line. However, it does not guarantee returns.

“If you looked at a typical portfolio there is not a guaranteed return, but with risk minimisation and diversity of crops, this is what we do to ensure good returns,” she says.

“However, there are different risks that are unexpected, such as the wind storm that hit our cotton crop a few years ago.

“But this led us to create new protocols for planting cotton to minimise the risk with what is generally a robust crop.”

Blaxland Vineyards director Ron Collins says planners must understand the real cost of the investment from the horticultural point of view.

“It doesn’t matter what type of investment you are in, there are common costs, such as land and water,” he says.

Collins says investors in Blaxland’s Old Mundulla Vineyard managed investment scheme were expected to earn $14,286 a lot in 2002. The scheme actually paid out $14,397 and there was an additional $2,400 from grape sales.

“In the three years the scheme has been running, we have been giving returns of more than 10 per cent,” he says.

“The key is to buy something that is a real investment that should include competent management in a tried and proven area relevant to the crop.”

Collins says people who establish vineyards without contracts for the grapes are misguided.

“You want an eight to 10-year contract with someone you recognise,” he says.

“In the wine business, you want to be with the top 20 to 30 wine companies to succeed.”

Old Mundulla grapes are sold on contract to McGuigan.

Blaxland is producing a new wine investment scheme for this year in the Barossa Valley and it already has a contract with Orlando Wines to take at least 85 per cent of the grapes.

Collins says planners still see managed investment schemes as an end of the year tax-effective investment, rather than looking at agribusiness as an all-year-around alternative investment.

“The majority of people will still want the tax deduction without checking if the scheme is viable,” he says.

“Blaxland now has more than seven projects, so people can see that we deliver by looking at our previous projects.”

One of the company’s projects was an almond scheme at Robinvale in Northern Victoria.

It has been providing returns at about 15 per cent above the prospectus forecast.

The scheme has benefited from a secure water supply and strong export demand for almond products.

Collins says the task of finding agribusiness sectors that will work falls to the manager undertaking proper research into potential markets.

Sometimes the research is easily available simply by looking at the Federal Government web site on rural investment.

“You just click on the product you want and it gives an overview of the market,” Collins says.

“If a financial planner were to check the web site to find out costs per hectare for the crop, they could then see how well the prospectus was priced.

“When looking at schemes water is now extremely important,” he says. “The big wine companies are now looking for a geographical spread of where they buy grapes from, so that is also important for potential sales of the grapes.”

Ferngrove Vineyards chairman Murray Burton says the vineyard they planted in 1997 in the Franklin Valley is giving quality returns (see Table 2).

“This is attributable to the quality of the management. We were conservative with our forecasts from the start,” he says. “This enabled us to live up to our result.”

Burton says there is always room for improvement as the company becomes more efficient at converting grapes into a high-yield investment.

“However, we have a very experienced team that knows the market. That knowledge went into the prospectus,” he says.

The management team consists of Merv Lange, who founded the successful Alkoomi winery in Western Australia, and Ted Avery, who was former general manager of Houghton Wines.

“Avery and Lange are ambassadors of the [wine] industry and they knew how to make the project work,” Burton says.

“The result is that Franklin is now recognised as producing top quality wines that have led the way into the local and international markets.”

The company has broken into the UK market through independent bottle shops, but Burton admits it took a long time.

After grapes and timber, olives have become one of the most favoured crops for agribusiness promoters.

The Australian olive industry is still young and trying to develop markets for its products.

The Barkworth Group has a number of olive groves and is a major shareholder in a South Australian olive oil processing plant that produces the Viva brand.

Australia imports about $150 million of olive oil annually from Europe, however, locally produced oil has made little impact in reducing imports.

The olive industry has developed a plan to replace a considerable amount of imports by 2020.

The proposal includes putting pressure on the Federal Government to put tariffs on imported olive oil in the hope the Europeans will cut subsidies to their local farmers.

It’s an uphill battle; the olive growers face tackling the stronghold European olives have in Australian supermarkets. Managed investment scheme investors, however, are seeing returns.

Barkworth national investment manager James Raines says the company’s older olive schemes are now paying returns, some within three years of planting.

“Our third scheme is scheduled to pay a return in its third year and investors had a dividend last year,” he says.

However, Raines admits the dividends have not been as high as the prospectus forecasts due to optimistic data on olive tree crops that was supplied when the offer documents were drafted.

“We took the figures from the former Victorian Department of Agriculture, which we have since discovered were optimistic,” he says.

“With the experience of growing the trees, we have found the forecasts were about double what we have harvested, but for investors the returns are still positive.”

Raines says the forecasts were based on the optimum growing conditions, something that rarely happens in practice.

The time for a managed investment scheme to deliver returns varies depending on the group.

Rewards Group marketing manager Neville Pollard says the company’s new tropical fruits scheme in the Ord River area of Western Australia is expected to give a return in year one.

“The scheme will pay its first return in November, as we have some established mango trees that are giving a crop,” he says.

The company has a range of different managed investment schemes in different agribusiness sectors.

Its teak project is expected to give a return in year 10, while the brushwood project will pay dividends in year five. The company’s grape projects pay returns in year three.

Timber investment schemes generally are not paying returns to investors yet, due to the long lead time to grow a crop.

Willmott Forests managing director Marcus Derham says timber projects are long-term, with his own being a 25-year project.

For planners looking at timber projects, the research must be comprehensive, partly due to the long-term nature of the projects.

“Research has to have a strong focus on markets and prices and we employ a team of experts to discover what those prices are going to be,” Derham says.

“It is also important that the research is independent to deliver long-term forecasts that are a certainty.”

However, Derham warns the forecasts are long-term projections and ultimately markets decide timber prices.

Investing in agribusiness schemes is a case of ‘buyer beware’, but with quality returns starting to flow from the sector, the outlook is encouraging.

While there are still a number of historic schemes that won’t be paying returns, in the current investment climate, agribusiness is returning an average 10 per cent return when many investment sectors are firmly in negative territory.