Agribusiness primed for bumper crop

The agribusiness investment sector has bounced back in 2002, according to the firstMoney Management/Lonsec Agribusiness Survey.

The survey of projects available to investors this year highlights that promoters are trying to raise nearly $800 million from 60 schemes in an industry that now boasts $3.1 billion of funds under management.

Lonsec Alternative Research Group general manager Marty Sammon says there has been a drop in the number of projects this year, but nowhere near the fall of last year.

The agribusiness market was particularly hit last year as the Australian Taxation Office (ATO) continued its campaign against agribusiness scheme investors.

Northwood Financial Services managing director Rod North says the agribusiness market is a lot brighter this year.

“The sentiment for agribusiness schemes is more favourable this year, as there are a lot less trip wires for investors to fall over,” he says.

Sammon says wine projects presented the biggest drop in agribusiness schemes this year.

According to the survey, there are only 12 wine projects available this year, which is well down on a sector that has dominated the agribusiness investment market in recent years.

The reduction in schemes is partly due to the fact that vineyards are finding it is becoming harder to win supply contracts from the major winemakers.

A recent Lonsec report into the Australian wine industry predicts looming oversupply, although a low Australian dollar means there is still growing export potential for vineyards.

“In 2000, a standout record for an increase in the amount of wine exported over the previous year [71 million litres] was established, making it Australia’s most successful year for exports,” the report says.

“The current projections suggest there will be as much, and more, additional wine available for export in each of the next three years.

“In the first of these three years, the additional amount available will be 98 million litres. The export challenge facing the industry in the next few years is considerable.”

The Lonsec report says there was more than 1,300 wineries in Australia last year, up 10 per cent on the previous year.

The four largest wine firms account for about 67 per cent of the grapes crushed and the top 20 wineries account for 81 per cent of the crush.

The most popular type of agribusiness scheme this year has been olives. This sector is looking to raise $188 million for projects ranging from Queensland to Western Australia.

Sammon says there has been growth this year in commodity-type agribusiness investments, such as timber and olives.

“We are also still seeing the exotic investments such as Paulownia trees and truffles,” he says.

“In between the traditional agribusiness schemes such as wine and timber, we are seeing olives, which are a recognised niche market, where we will see investors taking a punt.”

Although there is a fair crop of schemes this year, a number of existing players in the market are not producing schemes for 2002.

North says another reason for the fewer schemes on offer is the high cost of putting the scheme together.

“It now requires at least $500,000 to set up a scheme, including the legal work, producing a prospectus and gaining independent reports on the project,” he says.

Lonsec is also trying to categorise the various segments that make up agribusiness investments.

“By categorising the types of business, we are looking at marrying risk to the sector, which will benefit the investors,” he says.

“That will mean we can compare the olive schemes together, rather than with the overall agribusiness market.”

One company that has given investors the option of investing in a particular sector via one fund is Rural Funds Management’s (RFM) latest offering.

The trust, RFM Selection Fund, allows investors to go into cotton, vineyards or an organic fund. There is also a diversified option, which is a mixture initially of cotton and grapes on a geographical spread.

RFM marketing manager Michelle Smith says the diversified fund provides agricultural balanced funds for investors with different commodities encompassed into one fund.

In the past, entry into RFM agribusiness trusts had been for the top-end of the investment market, but the new trust will have a $3,000 minimum investment, with an entry fee of up to three per cent. There will also be annual redemptions for the first time.

This is expected to expand the client base for investment into agribusiness schemes.

Agribusiness has been a difficult sector to research and the quality of some research in the past has left a lot to be desired, despite the fact that North says it is the key to placing clients in agribusiness schemes.

“Planners should be looking at a couple of reports before making a placement of clients’ funds,” he says.

“There are now three to four dedicated research houses in the sector and it is vital that planners use these facilities.”

Lonsec and other research houses are trying to produce more detailed research to weed out the poorer schemes, which everybody agrees will benefit the entire industry.

“The key element we have to identify is the risk in a 20-year project and that is difficult,” Sammon says.

“The evolution of markets puts some projects into the critical sector in their lifetime.”

The most important factor in agribusiness research is putting the interests of the investor first, says Sammon.

However, one problem is producing comprehensive reports on schemes within the time frame that the financial planners want.

Sammon says the marketplace wants reports within three to four weeks on a scheme. Researchers need at least that amount of time to undertake site visits, check market conditions and run financial models on the economics of a project.

It has now become accepted that agribusiness investment schemes are here to stay. Sammon wonders if the promoters are undertaking enough research and development into the industries that will feature in a scheme.

“If the tax advantages were removed, I wonder if some schemes would be so attractive to investors,” he says.

Another thing that has made agribusiness schemes attractive to financial planners has been the high up-front commissions. In the past, commissions of up to 25 per cent have been paid — and 10 per cent was almost the norm.

North says most promoters of schemes this year will only be paying between five to six per cent commission.

“There are far greater levels of transparency in the area of research, which is identifying things like high commissions,” he says.

“There are still a few rogues out there, but investors can see now what the real nature of the business is.”

North says financial advisers are hoping the problems with the ATO do not occur again this year.

“A lot of planners last year could not go to their clients with new investment opportunities until the ATO’s problems with the old ones had been settled, but there definitely is more optimism this year,” North says.

Full list of agribusinessproviders, page 24´