Agribusiness: a growth asset

In the past five years, funds under management in the agribusiness sector have grown by as much as 80 per cent.

Last year, inflows into the sector topped $1 billion and similar figures are being bandied around for this year.

An indication of this year’s positive inflows comes from Great Southern’s half-year results.

The West Australian agribusiness manager had inflows of $79.3 million for the first half of this financial year compared with $20.5 million for the corresponding period in 2004.

This bodes well for the sector and with more money in the economy the number of agribusiness projects has also risen, Adviser Edge Investment Research managing director Shane Kelly says.

“When there is money around the supply of products increases,” he says.

“Our view is with increased product supply there should be about 15 to 20 per cent growth in the sector.”

Kelly says there are about 60 projects this year, which is up on last year.

The need for stability

Australian Agribusiness Group (AAG) research manager Tim Lee says he would like to see some stability in the sector, which has been missing for the past six years.

“We have seen inflows of $1 billion a few years ago, which then dropped down to less than $500 million, and went back up to $1 billion last year,” Lee says.

“The industry needs some years of steady inflows.”

Kelly says he is seeing more new projects that have moved away from the traditional timber investments.

“There has been more attention on alternative timber species, which we expect to see strong support from advisers,” he says.

“As returns from mainstream timber projects drop, the real value is in alternative timber products.”

Lonsec head of agribusiness Jim Blackburn says this year has seen the major managers continue to diversify their product offers.

“All the large managers, such as Great Southern, Gunns, ITC and Macquarie, have continued to diversify their product range, with most moving into the horticulture sector, although ITC is more in tropical forestry,” he says.

Product marketing

Blackburn also believes inflows into the sector will be in line with last year due to the early marketing push by the larger managers.

“Last year we believed the positive growth of Australian equities would create a demand for investments that could offset capital gains, which meant there would be good inflows into agribusiness this year,” he says.

“That is still true and has been offset with the managers making an early marketing push to advisers with reasons why they should be using this sector for clients.”

Blackburn says while the managers have not been pushing actual products, they have been talking about the types of product that will be available to advisers.

“The majority of managers have been marketing early, and that has been getting the advisers confident about the sector,” he says.

“That is why we believe inflows will be $1 billion or above for this year.”

Northwood Financial Services executive director Rod North says advisers are more interested in sectors other than timber and they are looking at what they will get out of them.

“Interest in the wine sector has been limited by supply and demand issues,” North says.

“If there was a viticulture project being looked at, the adviser would want to see clearly the people’s expertise and ability to sell the grapes.”

Tax concessions

North believes timber will take the lion’s share of funds raised this year.

“I expect timber schemes to take 70 to 80 per cent of funds raised this year,” he says.

“This is due to people getting the 100 per cent deduction, and that is still very important with advisers.”

North says accounting practices still see a lot of opportunities in timber because of tax deductions for clients.

“Funds this year will again go to the larger players and inevitably it will be those that deal with timber,” he says.

Lee says AAG had hoped there would be some more interesting types of agriculture included in the final product mix.

“We are disappointed that there is nothing new to the industry,” he says.

“But there has been some diversification with Timbercorp moving into avocados.”

Lee adds that AAG is reviewing one innovative project for the year — abalone.

“There is a predominance of timber schemes, although we are seeing some longer rotation saw wood schemes,” he says.

Lee also points out that the Government is reviewing the tax rules for timber and any changes could benefit the longer rotation timber market.

Lee says that while there are few new managers entering the sector this year, the arrival of more exotic timber schemes is welcome.

Another agribusiness area that is becoming a favourite with advisers is horticulture.

“With the short lead times for these projects, this is leading to continuing growth in this area,” Kelly says.

“It can take as little as a year to get a project to fruition.”

Timber alternatives

While very popular a few years ago, viticulture projects are again thin on the ground this year.

Kelly says while there are some new wine projects, the oversupply issue with grapes will make it more difficult for vineyard projects.

“Investors take a long-term view with vineyards. We expect to see a lower level of new vineyards, with more people sourcing grapes from established growers.”

One example is the Great Southern wine project for this year, which will be based on buying grapes rather than growing them.

Other new projects include a pearl farming scheme in the Northern Territory, a grain project in Western Australia and a number of walnut projects.

North says another favourite that has dropped off advisers’ radar screens are olive schemes.

“Olive schemes seem to be in limbo and there is not the interest in that sector there was,” he says.

“Some schemes, such as cattle, seem to do reasonably well as an alternative to timber, which is why some of the timber companies have diversified.”

Product diversification

Great Southern Group general manager Cameron Rhodes says more advisers are using other types of products.

“The advisers are diversifying by using products other than timber, as they don’t want to put all their eggs in one basket,” he says.

“There is increasing demand for projects other than timber, although this will still remain popular due to the low risk.”

Rhodes says the demand for projects that provide long-term income with tax advantages is also attractive for some clients. Great Southern is diversifying into other areas such as olives, viticulture and cattle.

“We are focusing on sectors where the produce can be exported, particularly to Asia,” he says.

“Crops such as organic olives, which are the fastest growing area of the olive market, have strong demand in Asia. Also cattle projects because Asia wants more beef and Australia has a good reputation for a clean product.”

The value of land ownership

A debate that has raged within the agribusiness industry is the land ownership of the project.

Historically, land was not included in the project, but in recent years it has become a prerequisite.

Macquarie Financial Services Group head of alternative investments Craig Swanhill says his organisation has been revisiting the land debate and now sees it as very important for delivering extra benefits.

“We have been looking at ways where the adviser can get extra value out of projects,” he says.

“Some of this has focused on where in the scheme you can buy something that will deliver an upside. A big factor for us is land ownership.”

Swanhill says this is particularly true where, after agribusiness use, the land can be sold for another purpose such as development.

“But if you don’t own the land, then you can’t get that upside,” he says.

“Without land ownership, you haven’t diversified the risks and others will benefit from the ownership.”

It is a similar situation with water licences.

“If you don’t own the water licence, then you are not achieving the potential growth of the investment,” Swanhill says.

“If you own the asset, then you are structured to benefit.”

Selecting the right investment

Land ownership has become a factor in Macquarie’s selection of projects for its approved list.

“Starting with a wide universe, we get the researchers to drill down on how we can approach a scheme from the upside,” Swanhill says.

“We start with looking at 50 schemes and end up with between five and 10. We cut the 50 down very quickly. If there is not land ownership, then they won’t get on the final list.”

Lee says, however, for many advisers land ownership is not a factor in making their final choice.

“Some investors want to invest in a scheme and then get out. Land makes the investment infinite,” he says.

“There is no right or wrong answer with land ownership.”

Lee also says with some smaller projects there needs to be land ownership to reduce the risks.

“But the larger schemes backed by listed management companies do not need land as the risk is reduced.”

With strong economic conditions in Australia, agribusiness seems tipped for a strong year of inflows.

“Last year the top four players accounted for 70 per cent of the inflows,” Kelly says.

“Great Southern will again account for probably half of the market, with its new projects such as King Island cattle.

“But for new players, if they haven’t realised distribution is king, then they will find it very difficult this year.”