The challenge of unearthing global capital

The agribusiness managed investment scheme sector (MISs) is not expected to escape the economic downturn that has hit the financial services industry.

Already the number of projects available in 2009 has fallen dramatically.

According to Adviser Edge Investment Research, there are 20 schemes from last year that are not proceeding this year.

These are mainly horticultural schemes affected by the Australian Taxation Office (ATO) court case during the first half of the current financial year — the ATO was testing whether MIS tax treatment fwas justified.

But some have not proceeded, again because of poor capital raisings last financial year and the uncertainty of the current investment market.

The horticulture sector is also down because of some big players, such as Great Southern, Rewards Group and Timbercorp, pulling their projects in this area.

Adviser Edge managing director Shane Kelly said the impact of the ATO court case had been felt, with only 10 non-forestry projects this year.

Kelly said the large players, such as Great Southern, pulling out of horticulture has affected the capacity to raise funds in the sector this year.

“Also, a lot of the smaller horticulture players haven’t the capacity to get their products quickly to the market after the court case decision,” he said.

Some horticultural managers, such as macadamia nut grower Maccacorp, are aiming to raise small sums this year because investors are reluctant to commit to the sector.

Maccacorp plans to raise $0.5 million, which is based on the company’s current tree plantings in Queensland.

However, it is not just the horticulture sector that is being conservative in its estimates of the amount of capital to be raised this financial year.

Kimberley Timber Corporation managing director Rick Ferdinands said his company was planning to raise $8 to $10 million this financial year.

“Our first MIS offering will be small compared to what we are doing in the wholesale timber market,” he said.

“We have set a minimum investment target of $3.5 million for the project.”

The Kimberley project crop is African mahogany trees grown in the Ord River district in Western Australia.

The company already has mahogany and sandalwood plantations in the area and the retail MIS scheme will provide scale to the operations to enable a timber mill to be established in Ord River.

If the project raises the full $10 million, Ferdinands said the company will also establish some plantations in Northern Queensland.

Mahogany is just one of the products from Australian MIS projects that has export potential.

Already, MIS projects are exports of such diverse commodities as woodchips, wine, almonds, abalone and exotic timbers.

Also, Australian exporters have been achieving strong prices for their commodities, which has been good news for investors.

Recently ITC, Timbercorp and Great Southern negotiated a benchmark price for woodchip prices to Japan.

The 2009 price negotiated was $207.40 per dry metric tonne, which was exactly the same as the previous year’s deal with Japan.

As the three companies noted, it was good to maintain the status quo with pricing in the current economic conditions rather than suffer a drop, which many other commodity producers were experiencing.

While this was a good deal for Australian timber investors, the global downturn has impacted on the interest in Australian agricultural schemes from overseas investors.

UK-based Radicle Projects has been investing in Australian MIS projects on behalf of European investors.

It has bought into tree projects during the past couple of years by raising funds on London’s AIM market.

Radicle chief executive Tim Bennett said the investor market in London for Australian agribusiness had virtually dried up.

“European investors at present have no money to invest in agribusiness although the institutions still have plans to invest in the sector,” he said.

“We are now seeing more interest in Australian agribusiness from the Middle East and the US.”

Bennett said Asia was also looking to invest in Australian agribusiness.

“These investors accept the risk of drought and other climate issues with Australian farming,” he said.

“They are looking for diverse (global) portfolios in the agribusiness sector to spread the risk.”

Bennett said these investors have a long time frame, so they are looking beyond what is happening in the immediate Australian climate.

“Another driver is where globally arable land is going to come from for food production and Australia is seen as part of that global portfolio,” he said.

“They also see the agribusiness sector coming out of the global recession sooner than other business sectors.”

While global investors are optimistic about the future of farming, the Australian MIS sector is facing a difficult three months ahead for capital raisings.

In previous years, the MIS sector has raised in excess of $1 billion each year.

This year Kelly estimates the total capital raising from the existing projects will be about $650 million.

“There is a limited supply of projects this year, which will affect the total amount being raised,” he said.

“And I also don’t think there will be any surprises in the Federal Budget that could affect capital raisings as in previous years.”

While Kelly is optimistic, some industry sources are predicting a figure of between $300 million and $400 million of capital raisings for the sector this year.

Bennett said the drivers for agribusiness haven’t changed.

“The interest from investors in food production hasn’t changed and the demand for soft commodities is still there from countries such as China and India,” he said.

However, are Australian investors going to move away from cash-based products to alternative investments such as agribusiness?

The answer will be known soon, as investors have until June 30 to show if they are convinced about the merits of the agribusiness sector.